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Treasury Department : : y r- ureau of Interna Revenue


Interna Revenue uetn
Cumuatve uetn 19 2-1
NU RY- UN 19 2
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SP CI L TT NTION d reced ,0 tne cautonary notce on ths page that pub-
_________________ 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 19 2-1
NU RY- UN 19 2
IN T IS ISSU
Page
Introductory Notes I
Contents - II
Rungs Nos. 109 -11138
oard of Ta ppeas 1-31
Income Ta
Part I ( . Interna Revenue Code and . 193S
ct) 33 163
Part II (1937 and 1936 cts) 16 195
Part III (1935 and 193 or Pror ets) .... 196 230
mpoyment Ta es 231-2 5
Msceaneous Ta es
state and Gft Ta es 2 6-25
Capta Stock Ta es 255-259
Saes Ta es, Stamp Ta es, etc 260-3
Msceaneous Rungs and Commttee Reports . . . 3 5 08
Inde 09 19
The rungs reported n the Interna Revenue uetn are for the nformaton of ta payers and ther counse as
showng the trend of offca opnon n the admnstraton of the Dureau of 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
any 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 Decsons to the entre
state of facts upon whch a partcuar case rests. It s especay to be noted that the same resut w not neces-
sary be reached n another case uness a the matera facts are dentca wth those of the reported case. s t s
not aways feasbe to pubsh a compete statement of the facts underyng each rung, there can be no assurance
that any new case s dentca wth the reported case. s bearng out ths dstncton, t may be observed that the
rungs pubshed from tme to tme may appear to reverse rungs prevousy pubshed.
Offcers of the ureau of Interna Revenue are especay cautoned aganst reachng a concuson n any case
merey on the bass of smarty to a pubshed rung, and shoud base ther |udgment on the appcaton of | 1
pertnent provsons of the aw and Treasury Decson to a the facts n each case. These rungs shoud be use
as ads n studyng the aw and ts forma constructon as made n the reguatons and Treasury Decsons pre-
vousy ssued.
a addton to pubshng a Interna Revenue Treasury Decsons, t s the pocy of the ureau of Interna
Revenue to pubsh a rungs and decsons, ncudng opnons of the Chef Counse for the ureau of Interna
Revenue, whch, because they announce 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 as
to be of genera nterest. It s aso the pocy of the ureau to pubsh a rungs or decsons whch revoke,
modfy, amend, or affect n any manner whatever any pubshed rung or decson. In many nstances opnons
of the Chef Counse for the ureau of Interna Revenue are not of genera nterest because they announce no
new rung or no new constructon of the revenue aws but smpy appy rungs aready made pubc to certan
stuatons of fact whch are wthout speca sgnfcance. It s not the pocy of the ureau to pubsh such opnons.
Therefor;, the numbers assgned to the pubshed opnons of the Chef Counse for the ureau of Interna
Revenue are not consecutve. No unpubshed rung or decson w be cted or reed upon by any offcer or
empoyee of the ureau of Interna Revenue as a precedent n the dsposton of other cases. Uness otherwse
specfcay ndcated, a pubshed rungs and decsons have receved the consderaton and approva of the
Chef Counse for the ureau of Interna Revenue.
UNIT D ST T S GO RNM NT PRINTING OFFIC : W S INGTON : 19 2
For sae by the Superntendent of Documents, Washnfton, D. C. - See back of tte for prce
LI R RY
UNI RSITY OF C LIFORNI
D IS
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The Interna Revenue uetn servce for 19 2 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 Treas-
ury decsons) pertanng to Interna Revenue matters. The sem-
annua 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, .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. , 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 19 1, ncusve, may do so at prces as foows:
Year.
Cumuatve uetn.
Prce
(cents).
Frst 6 months.
Second 0 months.
1922.
1-1
1-2
0, 30
1923
II-
11-2
30, 0
192 .
III 1
111-2
50, 50
1925
I -1
I -2
0, 35
1926
-
-2
0, 30
1927
I-1
I 2
0, 0
1928
III
II-2
35, 50
1929
III-1
III-2
50, 55
1930 .
I -1
I -2
50, 50
1931
-
-2
65, 30
1932
I-1
I-2
30, 30
1933
III
II-2
30, 50
193 ..
III-1
III-2
50, 60
1935
I -1
I -2
50, 50
1936
-1
-2
55, 5
1937
.1937-1
1937-2
60, 50
1938
1938-1
1938-2
60, 50
(1939-1
1939-2
60
1939 ...
I Part 1
50
Part 2
1
19 0
19 0-1
19 0-2
30, 60
19 1
19 1-1
19 1-2
5, 60
19 2
19 2-1
0
Persons desrng to obtan the servce n dgest form may do so at
prces as foows: Dgest No. 13 (1922-192 ), 60 cents; Dgest No. 17
(1925), 25 cents; Dgest No. 21 (1926), 15 cents; Dgest No. 22 (1925-
1927), 35 cents; and Dgest (ncome ta rungs onv, pr, 1919, to
December, 1930, ncusve), 1.50.
nqures n regard to these pubcatons and subscrptons shoud
be sent to the Superntendent of Documents, Government Prntng
Offce, Washngton, D. C.
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INTRODUCTORY NOT S.
The Interna Revenue Cumuatve uetn 19 2-1, n addton to
a decsons 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,
pubshed n the weeky uetns (19 2, Nos. 1 to 26, ncusve) for
the perod anuary 1 to une 30, 19 2. 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, 19 0, to une 30, 19 2.
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 1938), the aw headngs correspondng wth the
sectons of the Code and the 1938 ct, respectvey, and the regua-
tons headngs correspondng wth the secton headngs of Reguatons
103 and the artce headngs of Reguatons 101. Rungs under the
Revenue cts of 1937 and 1936 are prnted as Part II, the aw headngs
correspondng wth the secton headngs of those cts and the regua-
tons headngs correspondng wth the artce headngs of Reguatons
9 . Rungs under the Revenue cts of 1935 and 193 or pror cts
are prnted as Part III, the aw headngs correspondng wth the
secton headngs of the Revenue ct of 193 and the reguatons
headngs correspondng wth the artce headngs of Reguatons 86.
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, 19 0, are pubshed under artce
headngs of Reguatons 91 and 90, respectvey; rungs under Sub-
chapters and C, Chapter 9, of the Code n force on or after anuary
1, 19 0, are pubshed under the secton headngs of Reguatons 106
and 107, respectvey; rdngs under the Carrers Ta ng ct of 1937
and under Subchapter , Chapter 9, of the Code, are pubshed under
the artce headngs of Reguatons 100; and rungs under Tte III
of the Revenue ct of 1936 -Ta on un|ust enrchment are coded
under the sectons of that ct and the artce headngs of Regua-
tons 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.
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I
D. C. Treasury Department crcuar.
m. T. Ta es mposed by the Soca Securty ct, the Carrers Ta ng ct of
1937, and Subchapters , , and C of the Interna Revenue Code.
. T. state Ta Dvson.
G. C. M. Genera Counse s, ssstant Genera Counse s, or Chef 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. or M. T. 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.
NNOUNC M NT R L TING TO O RD OF 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 1926 ct, cause to be nsttuted
a proceedng n court for the coecton of any part of a ta determned
by the Commssoner to be due but dsaowed by the oard, pro-
vded 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 1926 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 nonacquesced 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.
Rung.
Rung No.
Page.
Treasury decsons:
5106
19 2-2-10D58
319
5107
19 2-3-10962
200
19 2- -10971
286
5109
19 2- -10966
359
5110
19 2- -10972
160
5111
19 2-5-10979
32
5112
19 2-5-10980
153
5113
19 2-5-10 81
88
511
19 2-5-10982
261
5115
19 2-6-10986
266
5116
19 2-8-11001
3 3
19 2-8-11000
328
19 2-9-11007
289
19 2-9-11006
112
5120
19 2-10-11016
97
5121
19 2-10-11018
330
bvr. . . .
19 2-10-11019
115
5123
19 2-10-11020
285
512
19 2-10-11021
112
5125
19 2-11-11025
101
5126
19 2-11-11027
1 7
19 2-11-11026
117
19 2-11-11030
278
19 2-13-110
271
19 2-1 -11053
327
6131
19 2-1 -110 9
1 7
19 2-1 -11050
333
5133
19 2-1 -11051
289
19 2-1 -11052
3 3
8135
19 2-15-11050
113
19 2-16-11060
73
19 2-16-11068
110
5138
19 2-17-1107
99
5139
19 2-18-11079
299
51 0
19 2-19-11089
329
51 1
19 2-19-11088
318
51 2
19 2-19-11086
295
19 2-19-11087
307
51
19 2-19-11085
290
51 5.
19 2-19-11091
298
19 2-19-11092
321
19 2-19-11093
322
51 8
19 2-19-1109
30
51 9
19 2-20-11099
93
5150
19 2-20-11100
29
S151
19 2-20-11101
3
5152
19 2-23-11118
3
5153
19 2-23-11120
1 5
515
19 2-2 -11127
281
5155 ,
19 2-36-11138
285
Court decsons:
1533
19 2-1-109 9
251
153
19 2-1-10951
3 5
19 2-1-10952
207
1536
19 2-1-10953
209
1537
19 2-3-10961
190
1538
19 2 -10969
272
1539
19 2-1-10970
276
15 0
19 2-5-10978
196
15 1
19 2-7-10990
212
15 2
19 2-7-10991
21
15 3
19 2-7-10992
217
15
19 2-7-10993
218
15 5
19 2-11-11028
2 0
15 6
19 2-12-11033
16
15 7
19 2-13-11039
198
19 2-13-11010
282
15 9
19 2-15-11057
289
1550
19 2-16-11062
257
1912-17-11071
255
1552
19 2-17-11073
2 6
19 2-18-1 on
17
155
19 2-18-11078
201
19 2-19-1108
225
Rung.
Rung No.
Page.
Court decsons Contnued.
1556 _
19 2-19-11083
181
1557
19 2-21-11106
227
1558
19 2-22-11111
171
1659
19 2-23-11119
173
1560
19 2-2 -11125
185
1561
19 2-2 -1112
161
Chef Counse s memoranda-
19 2-2-10955
15
19 2-1-109 6
50
19 2-1-109 7
75
230 7
1912-5-10977
1 1
23063
19 2-6-10983
103
2306
19 2-5-10976
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19 2-6-1008
133
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1912-10-11010
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19 2-19-110S2
106
2316
19 2-16-11061
168
232 3 .
19 2-22-11109
78
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19 2-16-11059
13
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19 2-16-11059
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19 2-7-10987
23
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19 2-7-10987
23
63 87 .-.
1912-7-10987
23
722 8
19 2-1-10963
12
722 9
19 2- -10963
12
72250
1912-1-10963
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19 2-1-10963
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19 2-7-10987
30
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19 2- -10983
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19 2- -10963
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19 2- -10963
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19 2-7-10987
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19 2- -10963
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19 2-8-10995
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19 2-1-109
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19 2-7-10987
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97158
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87161
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98077
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10277
102775
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Rung No.
19 2-1 -110 5
19 2-26-11132
19 2-26-11132
19 2-26-11132
19 2-26-11132
19 2-26-11132
19 2-26-11132
1912-22-11108
19 2-21-11102
10 2-8-10995
19 2-10-11009
19 2-2-1095
19 2-2-1095
19 2-9-11002
19 2-9-11002
19 2-12-11031
19 2-12-11031
19 2-21-11102
19 2-2-1095
19 2-8-10995
19 2-11-11022
19 2-22-11108
19 2-21-11102
19 2-1-109
19 2-9-11002
19 2-9-11002
19 2-8-10995
19 2-17-11069
10 2-21-11102
19 2-7-10987
19 2-11-11022
19 2-5-1097
10 2-2 -11121
19 2-9-11002
19 2-9-11002
19 2-9-11002
19 2-9-11002
19 2-9-11002
19 2-9-11002
19 2-25-11128
19 2-25-11128
19 2- -10963
19 2-9-11002
19 2-25-11128
19 2- -10903
19 2- -10963
19 2- -10963
19 2-25-11128
19 2 25-11128
19 2-25-11128
19 2-11-11022
19 2-22-11108
19 2-9-11002
19 2-9-11002
19 2-13-1103
19 2-9-11002
19 2-9-11O02
19 2-12-11031
19 2-23-11116
19 2-15-1105
19 2-17-11009
19 2-20-11095
19 2-9-11002
19 2-8-10995
19 2-16-11059
19 2-16-11059
19 2-16-11059
19 2-16-11059
19 2-13-1103
1912-11-11022
19 2-1-109
19 2- -10903
19 2-2-1095
19 2-7-10987
19 2-7-10987
19 2-7-109 7
19 2-20-11095
19 2-21-11102
19 2-11-11022
19 2-17-11069
19 2 22-11108
19 2-23-11116
19 2-9-11002
Page.
2
a
23
26
23
25
25
2.16
1,19
3
23
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6
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6
Rung.
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103302
103339.
103377
103 25
103 31
103609
103610
103611 -
103618
103633 -
103639
103669
10368
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103726
103787
103807
103808
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10 228
10 290
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10 952 ... -
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105005
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105060.
105211
105212
105213 --
105260
105 65
105511
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105539 -
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105620
10563
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105917
106089
106122
106.357
106539 -
106553
106566 -
106728 -
106729
106730 -
1069 6
107716
Offcc decsons (I. T.):
3526 -
3527
3528
3529
3530
3531
3532 ----
3533
353
Rung No.
Page.
19 2-8-10996
28
19 2-9-11002
11
19 2-25-11128
9
19 2-1-109
2
19 2-21-11102
12
19 2-15-1105
29
19 2-16-1105
29
19 2-16-1105
29
19 2-16-1105
29
19 2-23-11116
.21
19 2-9-11002
21
19 2-18-11075
16
19 2-1-109
21,23
19 2-20-11095
5
19 2-25-11128

19 2-25-11128

19 2-5-1097
27
19 2-10-11009
16,29
19 2-10-11009
16,29
19 2-1-109
27
19 2-2 -11121
25
19 2-1 -110 5
16
19 2-16-11059
7,23
19 2-16-11059
7,23
19 2-16-11059
7,23
19 2-11-11022
17
19 2- -10963
3
19 2-8-10995
27
19 2-12-11031
29
19 2- -10963
3
19 2- -10963
2
19 2-1-109
21
19 2-16-11059
7
19 2-3-10959
21,23
19 2-10-11009
28
19 2-1-109
31
19 2-1 -110 5
8
19 2-16-11059
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19 2-1-109
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19 2-2 -11121
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19 2-13-1103
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19 2-11-11022
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19 2-3-10959
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19 2-16-11059
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19 2-12-11031
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19 2-12-11031
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19 2-8-10995
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19 2-8-10995
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19 2-20-11095
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19 2-19-11081
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19 2-1-10963
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19 2-26-11132
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19 2-18-11075
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CONT NTS OF CUMUL TI ULL TINS (I. T.) 1 to 5; S. T. FOR 1920 ND 1921; INT RN L
R NU I I. 1-2. D-, 11-2, III-, ID-2, I -1. I -2, -. -2. II, I-2, II-1. II-2, n-. OT-2.
I -1, I -2, -. -2. I-1. I-2. II-1. n-2, I11-1. III-2. I -1. I -2. -1. -2. 1937-1.1937-2.
1938-1. 1938-2. 1939-1 (P RT 1 ND P RT 2), 1939-2. 19 0-1, 19 0-2, 19 1-1. 19 1-2, ND 19 2-1.
Cumuatve u tn.
Income Ta :
December, 1919 (No. 1)
anuary- une, 1920 (No. 2)
uy-December, 1920 (No. 3)
anuary- une, 1921 (No. )
uy-December, 1921 (No. 5)
Saes Ta :
1920 (S. T. 1-20)..
anuary- une, 1921
uy-December, 1921
Interna Revenue uetn:
anuary- une, 1922 (No. 1-1)
uy-December, 1922 (No. I-2
anuary- une, 1923 (No. II-)
uy-December, 1923 (No. II-2)
anuary- une, 192 (No. III-)
uy-December, 192 (No. II1-2)
anuary- une, 1925 (No. I -1)
uy-December, 1925 (No. I -2)
anuary- une, 1926 (No. -)
uy-December, 1926 (No. -2)..--
anuary- une, 1927 (No. I-1)
uy-December, 1927 (No. I-2)
anuary- une, 1928 (No. II-1)
uy-December, 1928 (No. II-2)
anuary- une, 1929 (No. III-1)
uy-December, 1929 (No. III-2)
anuary- une, 1930 (No. I -1)
uy-December, 1930 (No. I -2)
anuary- une, 1931 (No. -)
uy-December, 1931 (No. -2)
anuary- une, 1932 (No. I-1)
uy-December, 1932 (No. I-2)
anuary- une, 1933 (No. II-1)
uy-December, 1933 (No. II-2)
anuary- une, 193 (No. III-1)
uv-December, 193 (No. III-2)
anuary- une, 1935 (No. I -1)
uy-December, 1935 (No. I -2)
anuary- une, 1936 (No. -1)
uy-December, 1936 (No. -2)
anuary- une, 1937 (1937-1)
uy-December, 1937 (1937-2)
anuary- une, 1938 (1938-1)
uv-December, 1938 (1938-2)
anuary- une, 1939 (1939 1 Part 1 and Part 2)
uy-December. 1939 (1939-2)
anuary- une, 19 0 (19 0-1) -
uv-December, 19 0 (19 0-2)
anuarv- une, 19 1 (19 1-1)
uy-December, 19 1 (19 1-2)
anuarv- unc, 19 2 (19 2-1)
( III)
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O RD OF T PP LS.
CUMUL TI LIST OF NNOUNC M NTS R L TING TO
D CISIONS OF T UNIT D ST T S O RD OF T
PP LS PU LIS D IN T INT RN L R NU UL-
L TIN S R IC FROM NU RY 1, 19 0, TO UN 30, 19 2,
INCLUSI .
nnouncements reatng to the acquescence or nonacqueseence of the Commssoner n
decsons of the Unted States oard of Ta ppeas, as pubshed n the weeky Incrn
Revenue uetns from December 22, 192 , to December 31, 1931, ncusve, are prnted n
Cumuatve uetn -2, pages 1-106. Those prnted n weeky uetns from anuary 1,1932,
to December 31, 1939, ncusve, are pubshed In Cumuatve uetn 1930-2, pages 1-73. The
st beow, therefore, contans ony such announcements pubshed n the weeky uetns
from anuary 1, 19 0, to une 30, 19 2. ncusve
19 2-20-11132
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 .- 91958
cer Reaty Co 102119
dar, Mrs. Cornea, estate of 95 51
der, . P :. 97988
ffated nterprses, Inc.1 96603
en, Laura, estate of 80703
pena Savngs ank 89273
mercan Lberty O Co. oss
mercan Socety of Cnematographers, Inc 90 11
mes, Inc., S. . (now known as ennedy Co., /105891
Inc.) 10f9 6
nderson, ohn, transferee of estate of Frank O.
urrdge 9333
(97628-
ndrews et a., Charotte L.5 97631
11 99353
pe rewng Co., Inc .1 91977
1 cquescence reates ony to the oard s mathematca formua for apportonment of the dvdend credt
between the estate and the dstrbutees.
cquescence reates ony to the ssue, What amounts consttute reasonabe aowance for servces per-
formed n 1935 and 1936 by the wves of the two prncpa offcers of the corporaton
1 state ta decson.
cquescence reates ony to the Issue, Dd the respondent err n ncudng n pettoner s consodated
ncome for 1932 and 1933, sub|ect to depeton, the sums of 25,727.65, 27, 21.09, and 0, 5.27 whch pet-
toner s affate, the Wofford Producton Co., pad durng sad years to owners of o payment contracts on
ts Pnkston ease
cquescence reates ony to the ssue nvovng the 5 per cent penaty for neggence.
Rung No. 11132 ncudes a acquescence and nonacqueseence notces pubshed n the Interna
Revenue uetn servce from anuary 1, 19 0, to une 30, 19 2.
1
228
5
333
3
38

112
2
390
0
721
5
665
3
76
2
675
6
1020
0
9
6
007
0
1109
(1)
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cquescknces Contnued.
Ta payer.
ppeby, ohn S.1
tantc Land Co., The.
ugustus, zabeth G-.
yer, Frederck
.
ard et u ., Warner G. .
aker, Inc., mert
adwn, Frederc .3
anfed, T. .
ank of merca Natona Trust Savngs ssoca-
ton, e ecutor of estate of, and trustee of trust
e ecuted by, Wam ohn McGowan
ank of merca Natona Trust Savngs ssoca-
ton, trustee of Tonnngsen Trust
edford Trust, dward T.
ekns, atherne, estate of 7 .
ekns et a., Mo W., e ecutors of estate of ath-
erne ekns 7
echer, arret obrook
enaga et u ., rthur
en|amn Frankn Lfe ssurance Co., a Corpora-
ton
erks County Trust Co., aeged successor trustee
of Mortgage Trust Certfcate Poo
ernhemer Co., S. . M. .
geow, ce ., e ecutr of estate of erbert M.
geow 3 10
geow, erbert M., estate of 10
ack, Sr., Chares ... .
ack Motor Co., Inc
enhem Co., Ltd
ock, Meer S. 1
ossom et a., Car W., e ecutors of estate of
Dudey S. ossom 3
ossom Dudey S., estate of 3
ohn, Chares .
ok, Mary Louse 13
oton, rcher L
oard of Ta ppeas.
Docket
No.
oume.
Page.
9 080
100 10
96061
93019
1
3
0
5
18
7
1200
1 6
97 39
/ 92366
1 9 01
10113
f 93313
98688
I 99999
2
970
55
900
0


769
100967
3
695
99280
97260
87675
3
2
38
37
7 8
60
87675
9 879
87638
38
2
36
60
633
838
101813
6
616
98207
88978
2
1
1238
2 9
82659
82659
/103558
1105830
97232
95026
8 873
39
39
635
635
5
20
1
2
37
300
12 8
9 5
105266
105266
95953
105165
10 331
5
5
3
6
5
691
601
953
678
321
1 cquescence reates ony to the ssue. Was the sum of 150 whch was added by the Commssoner to
ohn S. ppeby s ncome, ta abe to hm
Prevous nonacquescence pubshed In Cumuatve uetn 19 1-1, page 12, wthdrawn.
state ta decson.
cquescence reates ony to the ssue, Is the pettoner entted to a deducton of 6,6 6.96 for the year
1937 as and for a debt ascertaned to be worthess and charged off durng that year
cquescence reates ony to the Issue, Was the communty property agreement of December 29, 1931,
effectve wth respect to persona property standng n the name of the decedent at tho tme of hs death
Pror nonacquescence pubshed n Cumuatve uetn 19 1-1, page 12, wthdrawn.
Pror nonacquescence pubshed In Cumuatve uetn 1939-1 (Part 1), page 0, wthdrawn.
Nonacqu scence pubshed n Cumuatve uetn 1938-1, page 3.1. wthdrawn.
Nonacquescence pubshed In Cumuatve uetn 19 0-1, page 5, wthdrawn.
Pror nonacquescence pubshed In Cumuatve uetn 1939-2, page 2, wthdrawn.
Pror nonacquescence pubshed In Cumuatve uetn 1938-2, page 37, wthdrawn,
Parta nonacquescence pubshed In Cumuatve uetn 19 1-1, page 12, wthdrawn.
cquescence reates ony to the Issue Invovng a deducton for deprecaton sustaned on a resdenta
property eased for a substanta sum durng the ta abe year and three separate pror occasons.
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cq escewcks Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
oton, Wam W
ondhoders Commttee 1.
ooth, Warren S.
oston evated Rawav Co.
ougny, Inc., R. .
ouvet Reaty, Inc.
rggs- an Co. . .
rnk et a., rg C, Trustees of Mnne M. Fay
Trusts , C, and S
rtt, Car M
rtten, r., et a., . F., e ecutors of estate of ay
R. Monroe
rookman, Murray
uckner, ffe Reed
uh et u ., Theodore D
ush, Irvng T
uter et u ., Cooey
Can, mma Wetmuer, e ecutr of estate of
ohn . Can, Sr.
Can, Sr., ohn F.., estate of
Cambrdge partment udng Corporaton
Caneo, arrv F.
Carey-Reed Co. ..
Carey Trust (Second)
Carson, Chares T.
Carona-Forda Reaty Co
Carter, Shrey, estate of
Castner Garage, Lmted .......
Cavett et a., ., e ecutors of estate of W. T.
aes
Center Investment Co
Centra anover ank fe Trust Co., trustee of
Trusts , No. 3586; , No. 3587; and C, No. 3588,
under deed from Louse Savage napp
Centra ansas Power Co., The
Chamberan et u ., Lowe -
Champagn County Servce Co ---
Cherokee Co
Chds, ctora
Chds, Wam, estate of
10 299
90 52
90 86
90 87
101336
101883
83 89
97991
100 80
102555
10 207
105212
92562
f98900-
I 98902
99522-
9952
95566
98216
95871
8 170
102 89
9936
101760
101330
101330
102205
66150
906 1
83936
93611
8756
10 800
93917
98502
93208
82350
101753
10175
101755
106539
96 10
101831
93962
102578
102578
5
0
3
5
5
6
0
2
3
5
1
5
5
5
5
3
3

1
36
1
3 )
6
0
3
0
3
6
6
3
5
1


1 cquescence does not reate to ssue respectng bases for deprecaton of pettoners assets.
cquescence s as to resut ony.
1 state ta decson.
Pror nonacquescence pubshed In Cumuatve uetn 1939-2, page , wthdrawn.
1 Pror nonacquescence pubshed n Cumuatve uetn 1939-1 (Part 1), page 2, wthdrawn.
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
by them aganst the purchase of stock In the Loca Federa 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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cquescences Contnued.
Ta payer.
Chryser Corporaton
Caborne et a., ustn Legh, e ecutors of the
estate of Laura en 1
Cnron Corporaton
Cohen Sons Co.,
Cohen Testamentary Trust, oe C
Coumba O Ga Co.2
Combs Lumber Co
Commodore, Inc., The _
Commonweath, Inc.
Conney, . L
Cook Drng Co.5
Cooedge, Norman -
Cooper, ugene ., admnstrator of the estate of
Lews F. Cooper -
Cooper, Lews F., estate of
Cooperatve Insurance
Cooperatve Power Pant
Crabb, Doores
Crawford Musc Corporaton
Creech, R. W
Cresp, Petro
Cumberand Portand Cement Co
Curts, Lan D., e ecutr of estate of Irwn .
Smth 1
D.
Daas Tte Guaranty Co. --
DasheU, C. R.7
Davdson, Cnton 8.
Davdson, r., Cnton 9
Davdson, Fora S.1
Davs et u ., Ma Thomas
Davs Co., The M. T
Davson- oseph Campau Reaty Co., Ine
Dean, Mason L.
Dearng, Roy ., estate of 10 -. -
Dearng, R. ., estate of, and trust estate ..
Dearng, Mrs. R. .10
Dearng et u ., Ws R.10
Docket
No.
97305
89703
105213
97939
96231
9062
915 3
f102997
103633
8826
102592
82231
92289
9 088
9 088
95292
95291
95002
/ 85389
88290
101780
103132
1019 1
102271
90 66
75056
r 93500
I 93503
9350
93502
103725
103726
97366
r 61205
I 69832
8 195
r 8 193
I 8 19
8 196
8 192
8 197
oard of Ta ppeas.
oume.
2
0
6
2
2
1
1
6
36
6
38
0
0
0
1
1
1
0
6
1

5
0
36
3
3
3
6
6
1
85
36
36
36
36
state ta decson.
cquescence docs not reate to Issue pertanng to aocaton of cost of equpment on the property n
queston.
cquescence reates ony to the ssue nvovng the deductbty of 5,2 8 for aeged necessary repar
to the pettoner s hote property.
Prevous nonacquescence pubshed n Cumuatve uetn 1938-1, page 38, wthdrawn.
cquescence reates ony to the ssue whether the far market vaue of future o payments, under the
drng and sae of ease contracts, shoud be ncuded n gross ncome of pettoner for the year 1932. Pre-
vous acquescence pubshed n Cumuatve uetn 1939-2, page 8, affrmed as to ths ssue ony.
cquescence reates ony to the Issue whether or not pettoner s an nsurance company as that term
s used n secton 701 (c)2 of the Revenue ct of 193 .
Nonacquescence pubshed In Cumuatve uetn 1937-2, page 36, wthdrawn.
cquescence wth respect to ssue nvovng the ta abty of certan commssons on fe nsurance
contracts s as to resut ony.
Pror nonacquescence pubshed n Cumuatve uetn 1937-2, page 36, wthdrawn.
Pror nonacquescence pubshed n Cumuatve uetn 1838-1, page 39, wthdrawn.
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5
cquescences Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
Dearng, Ws R.p e ecutor of estate of Roy .
Dearng 1
Dearng, Ws R., e ecutor of estate and trust
estate of R. . Dearng 1
DeLong, Davd .2
Dennston et u ., arod S.
Deube, George
Dstrct ond Co. ...
Doerken, dward, estate of 5
Doerken et a., Stephane, e ecutors of estate of
dward Doerken 66
Doenz, nton
Doar, gnes arr
Doar, . arod, estate of
Doar et a., Robert II, e ecutors of estate of .
arod Doar
Donahue, Mrs. esse W.7
Downng et u ., Rchard 8._
8 195
I 8 193
8 19
1012G
9 2S
/ 92055
950
/ 88970
9 86
103095
103695
93311
97283
98728
97282
98727
97282
98727
92980
99171
.
ggerman, Don, e ecutor of estate of mma Frye..
nhorn, Ma .
more Mng Co., Inc
ms, Grace W., estate of
ms et a., ames C., e ecutors of estate of Grace
W: ms
verson Corporaton 10
qutabe Lfe ssurance Socety of the Unted
States, The 11 -
qutabe Lfe ssurance Socety of the Unted
States, The .
qutabe Lfe ssurance Socety of the Unted
States, The
state Pannng Corporaton 13
usts, ugustus .
1 Pror nonacquescence pubshed n Cumuatve uetn 193S-I, page 39, wthdrawn.
cquescence reates ony to the ssue, Is the 1 ,000 ( ash receved by the pettoner on February 6. 1138,
from Francs . Lapont a part of the consderaton of the pettoner s mercan reach Machne Co.
stock
1 Pror nonacquescence pubshed In Cumuatve uetn 1938-2, page 1, wthdrawn.
Pror nonacquescence pubshed In Cumuatve uetn 1939-2, page 7, wthdrawn.
1 state ta decson.
cquescence Is as to resut ony.
T cquescence reates ony to the ssue whether the oard erred n decnng to permt the Commssoner
to rase an affrmatve ssue, n respect of certan amounts aowed as e penses, by amended peadngs sub-
sequent to the decson of the oard.
cquescence reates ony to the ssue nvovng the deductbty of 95.7 as a had debt.
Pror nonacquescence pubshed n Cumuatve uetn 1938-1, page 0, wthdrawn.
u cquescence reates ony to the ssue nvovng the far market vaue of certan pedged coatera on
the date of ts surrender.
Pror nonacquescence pubshed n Cumuatve uetn - , page 31 (193f ), wthdrawn.
a cquescence reates to a ssues e cept the ssue. May the company, on a cash recepts and dsburse-
ments bass, deduct guaranteed nterest pad In the ta year under settement optons e ercsed by the
benefcary, when such nterest had accrued n pror years
n cquescence wth respect to ssue nvovng the ta abty of certan commssons on fe nsurance
contracts s as to resut ony.
Pror nonacquescence pubshed n Cumuatve uetn I -2, page 30 (1935), wthdrawn.
36
36
3
37
2
39
6
6
1
1
1
1

3
101631

73S93
36
96520
2
100963
5
100963
5
93281
0
31110
1
332 1
1
33
57867
S929
.
93805
1
106089
6
93501
3
71637
30
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6
cquescences Contnued.
Ta payer.
vans, Mary .1..
wng, Sherman 2.
oon Co., The .
F.
Farmers Unon Cooperatve change .
Farre, Robert S
Fay, Mnne M., Trust, , C, and S
Ferree, C. .
Fdety Savngs Loan Co..
Fey, Mary Pyne
Frst Mortgage onds 7
The.
Frst Natona ank of Canton, The, e ecutor and
trustee of estate of dward . Langenbach
Frst Reaty Corporaton
Fsh, Frederck S., estate of8
Fsh, Grace S., e ecutr of estate of Frederck S.
Fsh 8
Fsh, Isaac, estate of
Fsher, zabeth . _
Ftch, F. W
Fa num Insuatng Co.10
Feschmann, Raou
Femng, Mrs. nna Maud .
Femng- mbe Corporaton 11
Femng, Wam 11
Fetcher, Lester Ly estate of8
Fetcher, Thomas L., e ecutor of estate of Lester L.
Fetcher 8
Fnn, George ., estate of
Fnn, r.. et a., George II., e ecutors of estate of
George . Fnn
Foyd, Incorporated
Foreman, Frank C
Forrester o Co
Freedman, Ma
Docket
No.
oard of Ta ppeas.
oume.
95527
93013
101276
100552
100139
(98900
I 98902
199522-
9952
615 2
101236
101237
98818
90 52
90 86
90 87
100 92
101558
99995
99995
96527
98637
933 0
98131
5120
90305
92958
9 690
92959
92957
9 689
10117
10117
103050
103050
99562
93915
937 8
99886
2
0
5
2
1200

238
1
765
1
32
725

71
5
826
1
0
881
6
5
5
5
2
5
3
5
0
1
1
1


5
5
3
0
3
3
1 cquescence reates to a Issues e cept as to the deductbty of attorney s fees and abstract fees n-
curred ncdenta to the estabshment of forfeture of a ease and obtanng repossesson of the eased premses.
Pror nonacquescence pubshed n Cumuatve uetn 19 0-2, page 11, wthdrawn.
cquescence Is ony wth respect to the transactons covered by paragraphs 2(a), 2(b), and 2(c) of the
stpuaton, and Is as to resut ony.
Pror nonacquescence pubshed n Interna Revenue uetn 19 1-7, page 1, wthdrawn.
1 cquescence s as to resut ony.
Nonacquescence pubshed n Cumuatve uetn I -2, page 30 (1935), wthdrawn.
I cquescence does not reate to Issue respectng bases for deprecaton of pettoners assets.
state ta decson.
Gft ta decson.
Nonacquescence pubshed n Cumuatve uetn -, page 79 (1931), wthdrawn.
II cquescence reates ony to the foowng ssues: (a) Dd each of the communtes of ay mbe and
wfe nd Wam Femng and wfe constructvey receve o payments of 60,8 8.65 and 53, 01.35, respec-
tvey, for 193 and 1935 from the Femng- mbe Corporaton, and (6) was a certan ,000 reservaton n
connecton wth the transfer by Wam Femng n 1936 of a easehod nterest n the Rchter ease, etc.,
ta abe to the pettoners
G
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1
3
-
0
1
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2
1

2
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3

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7
cquescencf.s Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
Frend et a.,
Frend
Mton ., trustees of estate of enry
enry, estate of.
re
Frost Co., G. C, a corporaton
Frye, mma, estate of
Fuham, ohn N
Funsten, . M
Furong, ohn T
G. . R. O Corporaton.
Gardner, . Ws 3
Garand et u ., Wam .
Garrabrant, George, estate of
Garrabrant, Margaret C, ndvduay and as e e-
cutr of estate of George Garrabrant
Garrett, the S. (formery the 8. Darngton)..
Gayord, Inc., Robert5 -
George ros. Co
Georga Marbe Co
Gerber Co., The ohn
Germantown Trust Co. et a., trustees u/w of Sarah
. McLean
Getz, stee C.
Getz, Mton .
Gan, G. arod
GUan, Lee . 7
GUan, Samue W.s
Gespe, Maud
Gette et u ., abert P
Gmore, een, estate of, transferee of estate of
Frank O. urrdge
Grard Trust Co., e ecutor of estate of Frederc .
adwn
Grard Trust Co., e ecutor of estate of George M.
enderson -.-
90672
91 15
/ 90672
1 91 15
100
101631
103252
102068
10 8
9260
92115
93589
955 7
100952
100952
99 5
96953
932 8
100555
101605
101688
72251
75611
79030
8 687
9306
72250
75610
79033
8 686
930 7
10 1 9
10 150
10 151
98770
10 368
93231
10113
10 952
10
0




5
0
1
2
3
5
5
5
1
1
6


5
5
5
5
5
3
6
0

5
1 cquescence reates ony to the ssue. What was the far market vaue of an od budng whch was
stuated on the and at the tme of e ecuton of the ease, and whch was torn down n connecton wth the
constructon, by the essee, of the new budng
1 Gft ta decson.
1 cquescence reates ony to the Issue, If the benefcares of a certan trust be treated as donees, were
the gfts made to them gfts of present nterests or future nterests
1 cquescence wth respect to the decson of une 28,19 0 ( 2 . T. ., 32 ), reates to tho Issue nvovng
the ta abty of nterest from muncpa bonds ssued under the Caforna Muncpa Improvement Dstrct
ct of pr 20, 1915. cquescence wth respect to the decson of February 27, 19 1 ( 3 . T. ., 731),
reates to the ssue nvovng the ta abty of the ncome from a certan trust estabshed by the |ettoner
for the support of hs wfe, the ony ssue presented at the second hearng and decded party n favor of
the pettoner and party for the respondent.
cquescence s as to resut ony.
Un|ust enrchment ta decson.
cquescence reates ony to the ssue nvovng the prce war.
1 state ta decson.
G
e
n
e
r
a
t
e
d

f
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U
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)

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2
0
1
3
-
0
1
-
2
1

2
0
:
5
3

G
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1
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9
6
8
0
7
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#
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8
cqu|escences Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas
oume.
Gensder Te te Co
Goodman, uus 1
Graf et u ., erbert R
Graff, verett D
Gravey, as. - ---
Greenwood Packng Pant, The
Grm, Cfford D--
Gruy, oseph, ndependent e ecutor of estate of
Luce Gruy
Gruy, Luce, estate of
Gump, fred S., estate of 2
Gump et a., Came R., e ecutors of estate of fred
S. Gump -
.
aass, Water F., trustee of uron Rver Syndcate.
ackett, mma P
aes, George .s
aes, Mrs. Oneta 3
aes, r., W. T. .
aes, W. T., estate of
arden et u ., Fred M.
arrs Trust Savng ank et a., e ecutors of
estate of Isaac Fsh
arrson, Lous .5
arrss, bbene C, estate of
arrss, Robert M., ndvduay and as admnstra-
tor of estate of bbene C. arrss...
aske, Meve
avemever, Dors D
awaan Trust Co., Ltd., trustee of oe Cohen
Testamentary Trust
eath, arret .
eer, dward .7
ems akeres
ems et u ., Pau
ems, Pau ., trustee
enderson, George M., estate of2
ggns, dus C.9
ggns, ugene
ghand Farms Corporaton ---
rsch, L.
onokaa Sugar Co
ooper, ames P., estate of2 10
102729
87552
/10 623
10 62
92212
100 5
105211
93919
95901
95901
90656
90656
100775
99302
93210
93209
93211
93208
98073
96527
87553
99993
99993
105620
10 576
96231
90599
/ 9 79
I 9 795
102603
10260
102602
10 952
1015 2
/ 80052
85961
95690
95782
101358
85776
6
0
5
0

6
0
2
2
2
2
I

0
0
0
0
I
2
0


6
5
2
38
1
6
6
6
5

39
2
2
3
1
Pror nonacquescence pubshed n Cumuatve uetn 1939-2, page 51, revoked.
1 state ta decson.
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
by them aganst the purchase of stock n the Loca Federa Savngs and Loan ssocaton, nto whch the
budng and oan assocaton was converted, represent ncome In 1935 sub|ect to norma ta and surta
cquescence s as to resut ony.
Pror nonacquescence pubshed n Cumuatve uetn 1939-2, page 52, revoked.
Pror nonacquescence pubshed In Cumuatve uetn 1939-1 (Part 1), page 50, wthdrawn.
7 cquescence reates to the Issue pertanng to the trust for the pettoner s mnor son manue,
Gft ta decson.
cquescence reates ony to the ssue, Dd the pettoner reaze ta abe gan as the resut of recevng
an award for compensatory damages
cquescence reates ony to the determnaton of the ue of the stock of Wam . ooper Sons
Co. on ugust 3, 1933.
G
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n
e
r
a
t
e
d

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2
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1
3
-
0
1
-
2
1

2
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:
5
3

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1
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3
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9
6
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7
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#
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9
cquescf.nces Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas
oume.
ooper, Mathde ., admnstratr of estate of
ames P. ooper 1 1
oover, erbert W
opkns, Wam R._ - --.
ote stora, Inc. ---
oward, Grace dams, estate of _.
oward et a., George dams, e ecutors of estate of
Grace dams oward
uey Php ardware Co
umme-Ross Fbre Corporaton..
umphreys, Murray
unter, C.
urd Mwork Corporaton . ..
uron Rver Syndcate . -.
yde, Mdred ., estate of -
yde, Suffok erks, Marguerte
yde, Ws O., admnstrator of estate of Mdred
. yde
I.
Ide, ohn ..
Industra Cotton Ms Co., Inc.
Interstate Transt Lnes, Inc ...
Irvne, ames
Isand Securtes, Lmted
.
ackman, D. S. ..
ask, Sophe, tradng as Whte ouse akery __
efferson Standard Lfe Insurance Co
erpe. . P
oe Co.
ohnston, . dward 1
ohnston, L. Mmnaugh
ones, Carre L., estate of1
ones et a., Cary W
ones, era Sprnger, e ecutr of estate of enry
Monroe Sprnger 1
ordan Creek Pacers . _
oseph, Wam
ourna Co., The
85776
9097
91753
97230
99851
99851
92801
93077
87899
99191
101956
100775
95182
81 17
93257
95182
1013 7
92186
101693
10 587
99082
101891
1002 1
89 22
103377
96535
93768
99377
91831
1102201
1102202
100125
/ 98057
1 99210
96036
96682
1
2
1
2
2
2
0
0
2



2
0
2
3
3

6
3
1 I
3

5
1
1
I
1
I
5
3
3

73895
36
95
73891
36
95
7389
36
95
106357
5
992
.
ahn, ea ...
ahn, Isdor 7
ahn, Lenora 7
ack, oseph N I 106357
1 state ta decson.
1 cquescence reates ony to the determnaton of the vaue of the stock of Wam . ooper Sons
Co. on ugust 3, 193.1.
1 cquescence s as to resut ony.
1 cquescence on the foowng ssue Is 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 ccrued the rent but aso havng charped t to a reserve
Tor uncoected rents
Gft ta decson.
1 Un|ust enrchment ta decson. cquescence s as to resut ony.
Pror nonacquescence pubshed n Cumuatve uetn 1938-1, page 8, wthdrawn.
G
e
n
e
r
a
t
e
d

f
o
r

L

n

Z
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n
g

(
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w

Y
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k

U
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v
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s

t
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)

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2
0
1
3
-
0
1
-
2
1

2
0
:
5
3

G
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2
7
/
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1
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3
2
9
6
8
0
7
P
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_
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#
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e
10
cquescences Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
aufmann, oe W
aufmann, Mdred
eth, Davd
eer, Charotte
ennedy Co., Inc. (formery S. . mes, Inc.)-.
esser O Gas Co
esau Petroeum Corporaton
an Co., . L.1
mbe, ay 1
mbe, Mrs. ema .-
rchner, mma R., e ecutr of estate of Freder-
ck C. rchner
rchner, Frederck C, estate of
eberg, ce G. .
eberg, ce G. ., e ecutr of estate of Robert .
eberg, Sr.
eberg, Sr., Robert ., estate of
napp, Lous Savage (grantor), Trusts , No. 3586;
, No. 3587; and C, No. 3588, Centra anover
ank Trust Co., trustee
nowes, dwn C. F --.
Lamberth et u ., en
Lamm Lumber Co.
Langenbach, dward ., estate of
Lapsey, ames
Larson, Rose . .
Laster, Caroyn Faust, transferee,.
Laster, . C, transferee
Laster, dward Carro, transferee
Laster Incorporated, . C
Lawrence, Wam amton
Lawson et u ., dward C
Lawson. Roberta C
Leary, Sr., . .
Leary, Myra L.7
Legg, Mdred Sheppard, estate of
Leno Cothes Shops, Inc
Letts, r., rthur
Letz, r., George ., e ecutor of estate of George .
Letz, Sr -
95082
95083
105618
93026
105891
,1069 6
930 1
95760
98691
92956
. 9 67
92955
, 9 673
102381
102381
86178
86178
86179
101753
10175
101755
91 95
95305
95306
10277
100 92
102201
102202
88813
9771
97716
97713
97 2
10036
99300
99301
768 5
768 6
899 2
1019 3
92857
999 0
1
1
5
1
6
1
2

1
1
6
6
3
3
3
6
0
2
5
6


3
3
3
3

2
2
3
3
0
5
1
5
1 cquescence rentes ony to the Issue nvovng the deductbty of contrbutons to the Y. M. C. . and
chamber of commerce.
cquescence reates ony to the foowng ssues: (a) Dd each of the communtes of ay mbe and
wfe and Wam Femng and wfe constructvey receve o payments of 60,8 8.65 and 53, 01.35, respec-
tvey, for 193 and 1935 from the Femng- mbc Corporaton, and (6) was a certan ,000 reservaton n
connecton wth the transfer by Wam Femng n 1936 of a easehod Interest n the Rchter ease,
etc., ta abe to the pettoners
1 cquescence reates to a Issues e cept that Invovng a bad-debt deducton of 20 .50.
cquescence reates ony to the Issue nvovng the deductbty of that porton of the presdent s saary
accrued whch was n e cess of the mtaton on the amount of cash wthdrawas for the presdent s saary
permtted by an agreement wth credtors.
1 cquescence reates ony to the Issue nvovng the deductbty of Interest pad n the amount of
1,901.96.
cquescence s as to resut ony.
Pror nonacquescence pubshed n Cumuatve uetn 1937-1. page 1, wthdrawn,
state ta decson.
G
e
n
e
r
a
t
e
d

f
o
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L

n

Z
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a
n
g

(
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Y
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k

U
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v
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t
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)

o
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2
0
1
3
-
0
1
-
2
1

2
0
:
5
3

G
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/


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2
0
2
7
/
u
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1
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b
3
2
9
6
8
0
7
P
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n
,

G
o
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#
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11
cquescences Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
Letz, Sr., George ., estate of
Levy, en
Lpstate et u ., Php arry
Lvngston, uan M
Lousana Iron Suppy Co., Ino
Lousve Fre rck Works, Inc., The.
Lucas, enry M
Lyon, Incorporated.
M.
MacConaughey, arry
Macon, Dubn Savannah Raroad Co.
MacPherson, Mae Recor 1
Madgan et u ., . P
Ma|estc O Corporaton
Maery et u ., Otto T. .
Maory et a., . ., e ecutors of estate of L. W.
Maory
Maory, L. ., estate of
Maoy, mma
Manufacturers Lfe Insurance Co., The.
Marborough ouse, Inc., et a.
Marborough Investment Co. .
Marthe, Louse, transferee of estate of Frank O.
urrdge
Martn, Thomas W
Maumee Maeabe Castngs Co., The
Mc pne Land Deveopment Co., Ltd., .
Mc rde, Margaret -.
McCarthy, mmett .s
McCoud et u ., Lous
McCormac, Gertrude ., trustee for . . Mc-
Cormac, r
McCormac, r., . . (trust)
McDane, C. T -
McGue, Chares -
McGowan, Wam ohn, estate of, aso trust e -
ecuted by
Mc nght, fred, admnstratorof estate of Thomas
Spruance
999 0
96037
93255
105539
97107
100 82
100516
f 93858
965 6
L 99832
92052
90592
92083
/101308
101309
96380
92373
95595
95595
/102526
103339
908 5
90 52
90 86
90 87
90 52
90 86
90 87
93333
93916
100933
99599
101335
101607
100961
93920
93920
99189
100 65
100967
9 78
9 820
t 9 821
101830
5
3
3
6

3

2
11
0
39
3
2
12


5
3
0
10
0
0

3


5
0
0
1
6
3
3
5
McLean County Servce Co
1 Pror nonacquesoence pubshed In Cumuatve uetn 1938-2, page 67, wthdrawn.
1 cquescence reates to a ssues e cept the Issue, Is the pettoner entted to a 1935 oss deducton for
the undeprecated cost of certan casng and other ease equpment whch coud not be removed from a
certan o we whch the pettoner ceased to operate, durng that year, because such operaton had become
unproftabe
1 cquescence Is as to resut ony.
cquescence does not reate to Issue respectng bases for deprecaton of pettoners assets.
1 cquescence reates ony to the credt of 2,500 as head of a famy.
state ta decson.
7 cquescence reates ony to the ssue, Was the communty property agreement of December 29, 1931,
effectve wth respect to persona property standng n the name of the deoedent at the tme of hs death
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12
cqukscences Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
McLean et u ., Marrs 1
McLean, Sarah ., trust u/w of.
McLeod, eth
McLeod, Mary
Medca Dagnostc ssocaton,
Menefee, ortense
Meyer, en R.
Meyer, ay C.
Md-Contnent Securtes Co., The .
Mdand Cooperatve Whoesae, a Cooperatve
ssocaton
Mbank, Dunevy
Mer, uus C
Mmnaugh, ugene
Mooney ectrc Co.
Monarch Lfe Insurance Co.
Monroe, ay R., estate of
Moock ectrc Suppy Co., The
Morrs Pan Co. of St. oseph, The
Morrson ond Co., Ltd
Morrstown Trust Co., e ecutor of estate of Wam
Chds __
Mortgage Trust Certfcate Poo
Morton, rthur F
Mott, Dee Furey s
Mout on, Chares Day
Myers, George R
N.
Natona ank of Commerce of San ntono, Te . .
Natona Commerca ank Trust Co. of bany,
e ecutor of estate of Leonard S. Wadman 7
Nchos, . C
77 19
77 20
81391
81392
8680
86805
9 02
9 03
101688
10 57
10 573
96563
103 31
722 8
75613
79032
8168
930 8
722 9
75612
79031
8 685
930 6
106729
100612
93050
102985
99358
96076
86801
87 1
98216
9628
9781
93362
95986
102578
9S207
91 9
71903
100960
9 70
9316
10 898
89169
1

5
5
2
0
5
5
6

1
5

2
38
5
1
2
1
2

2
1
35
5
2
0
6
2
1 cquescence reates to a Issues e cept the ssm
t ns for percentage depeton based upon sums rece
uf Producton Co., and. f they are entted to d(
rross proceeds from the sae of producton from the
(rved by the pettoners from the prop
. whethre or not the pettoners are entted to deduc-
ved by them pursuant to certan agreements wth the
peton, shoud t be computed as a percentage of the
pro ertes or as a pcerentagc of the actua amount re-
cquescence s ony wth respect to the ta abty of the ncome from the wfe s trust.
1 cquescence reates ony to the deductbty n 193 of the amount pad to the Frst Natona ank of
St. Lous n connecton wth the qudaton of the Frankn mercan Trust Co., such acquescence beng
ony n the resut.
Pror nonacquescence pubshed n Cumuatve uetn 1939-1 (Part 1), page . , wthdrawn.
Nonacquescence pubshed n Cumuatve uetn 1937-1, page 3, wthdrawn.
8 Pror nonacquescence pubshed n Cumuatve uetn 19 0-1, page 8. wthdrawn.
state a decson.
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13
cquRsc Nc S Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
Ncoa, arry T.1 _
North Range Mnng Co...
Norweb, mery May oden s.
Norwood-Whte Coa Co.
O ren, . Chares
Orange Securtes Corporaton
Ortz, ce duPont -
Orthwen, Dorothy Mc rde
0 SuIvan Rubber Co., Inc. (n dssouton)
Oswego Fas Corporaton 8
Pan- mercan Lfe Insurance Co.
Parker, . rooks -
Parrsh, Percva
Parsons, Regnad -
Patton, T. ._ -- --
Peck Peck (New York) -
Peck Peck Corporaton, The
Peck, Robert owman -
Perkns, Raph
Pettus, ames T
Pettus, May W., trustee of the ames T. Pettus
trust for Irene Pettus and ames T. Pettus. r..
Pettus trusts for Irene Pettus and ames T. Pettus,
r., ames T -
Peyton, Mrs. Loe M. Randoph, transferee
Pfeffer, ar
Phney odng Co., Inc
Pedmont-Mt. ry Guano Co.
Perce, D. W -
Peron udng Trust -
Pnkney Packng Co
Pnne, Chares - -
Pper et u ., T. ugene
Pttsburg Canners, Inc
Punkett, Theodore R -
Pontare, Mchae
Porter et a., . oward, trustees, dentfed as
Porter Propertes Trustees, Ltd
Porter Propertes Trustees, Ltd --
Producers O Corporaton --
Pupn, Mchae I., estate of 10 11
93821
98188
102 35
92575
102069
100953
10 99
93159
10 70
97399
10216
8 638
101676
103 06
97008
93918
99288
9931
10060
96126
102775
102776
102777
102776
102777
96759
99273
88988
1757
92278
103105
8892
1002 9
101766
93560
9 017
83199
95762
95762
93839
92177
2
6
1
5
5
5
2
5
2
16
US


1
0
2
2
5
1
5
5
15
1
I
3
3
1
15
2
5
5
11
II
35
2
2
3
:s
1 cquescence reates ony to the Issue, Is the pettoner entted to a deducton of (13.225 as a bad debt
for the year 1935
t ta decson.
Un|ust enrchment ta decson.
cquescence reates ony to the ssue, whether the pettoner s entted to any deducton as the resut
of the satsfacton of the defct e stng n her husband s brokerage accounts at the end of the year 103 .
1 cquescence reates ony to the Issue nvovng the deductbty as a busness e pense of 3,500 pad to
the Futon Cub durng the ta abe year.
Parta nonacquescence pubshed n Cumuatve uetn 1939-1 (Part 1), pase 59, wthdrawn.
1 cquescence reates ony to the ssue, Was the pettoner entted to a oss on an nvestment of 17,250
In the Fourteenth Carnege Co. for the year 1926
Nonacquescence pubshed n Cumuatve uetn -, page 89 (1931), wthdrawn.
Pror nonacquescence pubshed n Cumuatve uetn 1939-2. page 63, wthdrawn.
u state ta decson.
Pror nonacquescence pubshed In Cumuatve uetn 1939-1 (Part 1), page 60, wthdrawn.
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0
1
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2
1

2
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5
3

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1
cquescences Con t nued.
Ta payer.
R.
Randa, . G., estate of
Randa, Luther ., e ecutor of estate of . G.
Randa
Ravenscroft, . F
Regas Reaty Co.1
Retsa Drng Co.
Reynods, Inc., R. C.s.
Reynods, Ron C
Rce, ohn Preston 5
Rtche, Montgomery . W., admnstrator d. b. n.
of estate of Mrs. Cornea dar
Rversde akng Co. ( . W. Stockton, D. . .) ..
Robnson, W. C
Rooke, Robert L
Roosevet Investment Corporaton
Rosenau, arret W.5
Rosenstock, nna, ndvduay and as e ecutr of
estate of Isaac M. Rosenstock 8
Rosenstock, Isaac M., estate of8
Ross ros. orse Mue Co
Ross, Mary Catherne
Ross, W. R
Ross, ndrew .
Rotorte Corporaton
Rowan Drng Co., transferee 7
Rowey, dward G., transferee of estate of Frank
O. urrdge
Safe Depost Trust Co. of atmore, e ecutor of
estate of Mdred Sheppard Legg
St. Lous Unon Trust Co. et a., e ecutors of estate
of Carre L. ones -
Satsten, Maurce S., estate of, transferee
Satsten, Sophe L., admnstrat of estate of
Maurce S. Satsten, transferee
Scanon, Robert . -
Scheffen, Lucy S., estate of -
Schesnger, Rosa 8
Schey et u ., uan Larcombe --
Schoekopf, r., acob F
Schutz et u ., Nes --
Docket
No.
10 905
10 905
99192
96360
/ 95776
t 97715
/ 9801
98017
/ 97718
t 98015
10212
95 51
101627
99038
98112
101 53
86 07
91686
91686
9 76
9 75
/ 9 7
98898
96 70
88606
98532
93332
899 2
91831
105060
105060
98020
99961
73892
99 0
76377
/100 0
1100 1
oard of Ta ppeas.
oume.
6
(1

3
2



3

2
3
5
37
1
11
3
3
3
1
0

0
10
1
6
6
2

36
2
35

1 cquescence s as to resut ony.
cquescence reates to a ssues e cept the ssue whether R. C. Reynods. Inc., reazed ta abe gan
upon the purchase of shares of ts own stock and contracts reated thereto n 1935.
Nonacquescence pubshed n Interna Revenue uetn 19 1-32, page 1, wthdrawn.
Un|ust enrchment ta decson.
Gft ta decson.
state ta decson.
cquescence reates ony to the ssue. Is the pettoner s transferor entted to deductons as ordnary and
necessary busness e penses amounts e pended In 1932 n the drng of o wes for cash, competed n 1933
1 Pror nonacquescence pubshed n Cumuatve uetn 1938-1, page 55, wthdrawn.
G
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2
0
1
3
-
0
1
-
2
1

2
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:
5
3

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#
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15
cque8cence8 -Contnued.
Ta payer.
Schuman Carrage Co., Ltd
Scuy, ohn C
Seavey Farshem rokerage Co_
Second Carey Trust _ _
Securtes Co. of New ersey
Sensenbrenner, F. .
Seward Cty Ms.
Shamrock O Gas Co
Sharp et u ., . Cec
Sheden Land Co.
Shenandoah aey Natona ank (Shrey Carter
estate)
Sherman, Dors ond 11
Sherwn, Francs M
Sherwn, ohn
Shoenhar, Martha Locke
Sver, Ma
Smon, ose, estate of
Smon et a., ose P., e ecutors
Savn, rthur M
Smth, Chares G
Smth, Irwn ., estate of
Smth, ames, estate of
Smth, Madene Weder
Smth, arvara Pupn, admnstratr of estate of
Mchae I. Pupn 1
Smoak, ott
Smvth, r., Francs G., transferee of estate of Frank
0. urrdge
Smvth, erbert C, transferee of estate of Frank O.
urrdge
Smvth. erbert C, admnstrator of the estate of
een Gmore, transferee of estate of Frank O.
urrdge
South tantc Steamshp Lne
Spva, George N
Spor, Sr., Cypran ., estate of
Spratt, Chares N..
Sprnger, enry Monroe, estate of
Sprngford, erbert
Spruance, Mrs. ortense
Spruance, Thomas, estate of.
Staey, ugustus .1
Staey, mma L.1
Standard O Co. (and affated subsdares).
Staney, Wam
Docket
No.
90012
101992
91618
93611
1050 9
107716
92099
98588
97 25
, 97 26
93196
93917
95300
106730
106728
102675
100186
918 0
918 0
9 768
9391
102271
105515
95003
92177
100036
93331
93232
93231
988
98293
92588
97917
100125
972 7
9 785
9 786
9 78
9 820
9 821
88772
88773
86516
96558
oard of Ta ppeas.
oume.
Page.
3
880

1279
1
198
1
800
5
10 8
6
713

173
2
1016
2
336
2
98
0
7 9
1
898
6
330
6
330
5
576
2
61
0
650
0
650
3
1100
0
7 9
5
59
6
337
1
686
38
1218
3
907
0
9
0
9
0
9
2
705
3
117
0
92
3
503
5
561
1
1001
3
221
3
221
1
752
1
752
3
973
1
1233
1 Ott ta decson.
cquescence reates ony to the Issue, whether certan osses suffered by pettoner as the resut of fore-
cosures of propertes owned by the pettoner are deductbe n the year of forecosure or n the year In
whch the equty of redempton e pred.
1 cquescence reates ony to the year 1935.
state ta decson.
Pror nonacquescence pubshed In Cumuatve uetn 1939-1 (Part 1), page 60, wthdrawn.
G
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2
0
1
3
-
0
1
-
2
1

2
0
:
5
3

G
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3
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7
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16
cquescencks Contnued.
Ta payer.
Stark, . . Lutcher, e ecutor of estates of M. M.
Stark and W. . Stark
Stark, M. M., estate of --
Stark, W. ., estate of1
Stern, son L. S.s
Stewart, ames R.
Stfe, rthur C
Stockton, . W., D. . . Rversde akng Co.s._
Stoberg ardware Co., The
Strecker, Lous
Stroud Co., Inc -
Suffok erks, Marguerte yde ...
Docket
No.
Sutana O Corporaton (Deaware).
Sunset-Luce Co
SutcfTe Co., The
Sutff, Water
Swan, Sherwood
Swastka O Gas Co
Tabott, atherne ., estate of7
Tabott et a., arod ., e ecutors of estate of
atherne . Tabott
Tayor et u ., arden F.8
Terhune, Wesey .
Thatcher, Lester ., transferee of estate of Frank O.
urrdge
Thatcher et u ., Thomas
Thomas et u ., arry
Tcker Pubshng Co
Totson, Frank F., estate of
Totson et a., Isabee I., e ecutors of estate of
Frank F. Totson 79
Tmberake, stee Fntom
Tmberake, .
Tmmerman, Lous F
Tte Guarantee Trust Co. et a., e ecutors of es-
tate of Lucv S. Scheffen
Tte Guarantee Trust Co., trustee of dward T.
edford Trust3
Todd, Wam U
Tomfohr, Pauyn
103807
103808
103807
103808
9313
89950
100001
101627
100791
96038
10 012
81 17
93257
: 90078
90079
9396
9 235
103669
101190
90861
97128
97128
99262
9389
93335
103835
100962
101606
100563
100563
101097
101096
96317
99961
97260
101312
98037
oard of Ta ppeas.
oume.
5
5
.5
-10
39
-1(1

6
3
5
0
0
1
1
0

0
2
2
3
0
0
5
5
(


11
6
2

2


1 cquescence reates ony to the ssue, re the ta payers entted n 1937 and 1938 to the deducton of the
osses resutng from the operaton of a easehod prevousy acqured by the decedents where n decedent s
estate ta returns a deducton was taken and aowed for the estmated amount of such operatng osses over
the remanng perod of the easehod
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
Pror nonacquescence pubshed n Cumuatve uetn 19 1-1, page 19, wthdrawn.
Gft ta decson.
(t n|ust enrchment ta decson.
cquescence on the foowng Issue 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 on -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
r state ta decson.
cquescence reates ony to the ssue whether gans were reazed n 1936 or In 1937 from saes made on
the ast two days of December, 1936.
cquescence reates ony to the deductbty of attorneys fees from gross estate.
G
e
n
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d

f
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)

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2
0
1
3
-
0
1
-
2
1

2
0
:
5
3

G
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2
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2
7
/
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1
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3
2
9
6
8
0
7
P
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17
cquescknces Contnued.
Ta payer.
Tonnngsen Trust, ohn and Paune
Torney, eannette Wrght, admnstratr of estate
of Me Langey Wrght 1
Traser, Rchard ., estate of 2
Trevor, my 3
Tuey, ddson L., estate of
Tuev, esse ., trustee of estate of ddson L.
Tuey
U.
Unon Guardan Trust Co
Unon Shpbudng Co., aeged transferee
Unted States Fdety Guaranty Co
Unversa Motor Co
Unversa Wndng Co
U. S. Industra coho Co. (W. a.)
U. S. Unversa onts Co
Docket
No.
.
aey Lumber Co. of Lod
aey Tractor qupment Co.
auaton Servce Co., The
W.
Wadman, Leonard S., estate of
Water, Wam
Warrck, Dupuy G
Washngton Raway ecrc Co,
Washngton State ppes, Inc
Watkns, Forence
Wegeforth, Le S.
Wengarten, Inc., .5
Weder, r., ames F
Wenger, Mary .6
West, ames
Wheeer, een vans 7
Whtthorne, W. R., estate of
Wco , se .8
Wco , Gay ord P.
Wco , Mabe I.
Wams Furnture Corporaton.
state ta decson.
cquescence reates ony to the oard s mathematca formua for apportonment of the dvdend credt
between the estate and the dstrbutees.
Oft ta decson.
cquescence reates ony to questons nvovng the rates of deprecaton aowabe durng pror years
n estabshng, the bases of certan assets sod or abandoned, and s as to resut ony.
1 cquescence reates to the ssue whether pettoner s entted to deduct as a oss the sum of 20, 13.80
representng ts nvestment n certan cense agreements coverng the use of a merchandsng system.
cquescence reates ony to the ssue, Is the oss sustaned on capta assets beongng to the trust a
capta or ordnary oss Nonacquescence pubshed n Cumuatve uetn 19 0-2, page 1 , wthdrawn
a so far as t reates to ths ssue.
7 cquescence reates to a ssues e cept as to the deductbty of attorney s fees and abstract fees n-
curred ncdenta to the estabshment of forfeture of a ease and obtanng repossesson of the eased premses.
1 cquescence reates ony to the ssue. re the pettoners ta abe n 193 as benefcares under the
r of George N. Wco upon ncome earned n 193 by the estate durng admnstraton
99280
99579
91958
89820
99190
99190
9 687
100025
91398
98503
99752
8735
( 90713
I 9071
10270
100 21
95878
90373
101898
97537
99162
98689
92- 35
100723
1006)0
91708
99707
95005
92215
101 0
95528
101189
96S30
96831
96827
10 191
oard of Ta ppeas.
oume
3
37
3
551
1
228
0
12 0

56

56
1
1306
3
11 3
0
1010
3
1
39
962
2
1323
6
111
3
23
2
311
1
811
6
291
2
9 1

1068
0
12 8
6
6
3
900
2
633

798
1
686
2
225

1159
2
2 6

123
3
931
3
931
3
931
5
928
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18
cquescences Contnued.
Ta paypr.
Docket
No.
oard of Ta ppeas.
oume.
Page.
Wson, ohn P.1
Wson, Morrs
Wnston ros. Co.
Wnthrop, eekman s
Wsconsn Farmer Co
Wocott, Frank
Wof, dth
Wood, zabeth .
Wood, Orrn G.
Woods Lumber Co.8
Worcester County Trust Co. et at., e ecutors of
estate of ames Smth 7
Word, nna
Word, T. T
Word Suppy Co., T. T
Wrght, Me Langcy, estate of 7
Wvman et a., rthur M., trustees of Wyman
udng Trusts No. 1 and No. 2
Wyman udng Trusts No. 1 and No. 2
Y.
Young, Du os 8
Z.
Zeer, bene P., estate of
Zeer et a.. ohn ., e ecutors of estates of bene
P. Zee and ohn G. Zeer..:
Zeer, ohn G., estate of
931 0
9802
59270
79850
105917
100008
92 29
9500
92 89
97 7
105515
935 3
935 2
935
99579
10 238
110 239
/10 238
10 239
783 5
101 29
101 29
101 29
2
2
29
36
6
2
1
1
0

6
1
1
1
3
5
5
31
5
5
.
1260
125
905
31
116
1151
1231
686
90
88
337
965
905
965
551
155
155
6 8
1060
1060
1060
The Commssoner does NOT acquesce n the foowng decsons of
the Unted States oard of Ta ppeas:
oard of Ta ppeas.
Ta payer.
Docket
No.
.
oume.
Page.
bbott, ohn, e ecutor of estate of Rchard .
919.58
95102
1
228
98
beson et u ., acob

cquescence reates ony to the ssue, Where ta payer creates a trust for the fetme of hs adut daugh-
ter, s the trust ncome ta abe to the grantor under the provsons of secton 1(30 of the Revenue ct of 193
a Pror nonacqueseence pubshed n Cumuatve uetn III-2, page 38 f 193 ), wthdrawn.
Nonacqueseence pubshed In Cumuatve uetn 1937-2, page 56, wthdrawn.
Gft ta decson.
1 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
nstrument consttutes a compete gft.
cquescence s as to resut ony wth respect to the ssue, Were the operatons of the pettoner, the
Woods Lumber Company of Tennessee, and the Woods Lumber Company, Inc. of rkansas, the
operatons of a snge ta abe entty, so that tte oss sustaned by the rkansas busness coud be used to
reduce ta abe ncome of the Tennessee corporaton
7 state ta decson.
8 cquescence reates ony to ths ssue, Was the e change of certan certfcates of ownershp n a trust
for underyng portfoo stock represented there by an e change of dfferent assets, resutng n a capta oss
Prevous nonacqueseence pubshed n Cumuatve uetn -2, page 51 (1936), wthdrawn wth respect
to ths ssue ony.
Nonacqueseence 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.
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19
NoN C U SC PC S Contnued.
Ta payer.
beson, Lester -
cme reweres (transferee)
dams, enne rrott
dams, Mabe G.1
ffated nterprses, Inc.
abama sphatc Lmestone Co.
en, . Wadegh, estate of
en, ohn
en, r., et a., ona
en, r., et a., ona, e ecutors-
en et a., ctor
ng, Noyes ., estate of
mbrose et u ., W. D
mercan Lberty O Co.
mercan Lght Tracton Co _.
mercan Steamshp Owners Mutua Protecton and
Indemnty ssocaton, Inc
msco-Wre Products Corporaton, transferee
ndrews et a., Charotte L
ppeby, dgar S., estate of - -
ppeby et a., dgar T., e ecutors of estate of
dgar S. ppeby... ---
ppeby, ohn S.9
rmour, Lota S
tkns Co., . C-
tknson, Wam G. (aso known as Pau Cava-
nagh) . -
vaon Paper Co., transferor
.
atmore Steam Packet Co.
anfed, T. .
ank of merca Natona Trust Savngs ssoca-
ton, e ecutor of estate of, and trustee of trust
e ecuted by, Wam ohn McGowan 8 .
arbour, dth enry
ateman, Lady Maran
eck, Martn 1
95103
101296
98106
101820
96003
91793
93811
93812
93809
93811
93810
87136
/ 957
957 5
/ 98 87
98 88
9723
10292
100098
97628-
97631
99353
93886
93886
9 080
/ 88151
93150
99196
95500
101162
102559
93313
98688
99999
100967
10071
98766
99 39
oard of Ta ppeas.
oume.
-11
3
1 I

2

1
1
2
3
2
6
11
6
1
1
1
1

2
3
1
2
3
I
3
3
Page.
OS
721
08
1091
390
32
200
191
1 05
76
1121
27.-.
717
607
18
s
IS
777
1
1037
5 1
629
709
695
1117
69
1 17
Issue, Is the pettoner sub|ect to surta as a persona hodng con-
cts of 193 and 3f
1 Gft ta decson.
1 Nonacquescence reates onv to the
pany under sectons 351 of the Revenm
1 state ta decson.
Nonacquescence reates to a ssues e cept the ssue, Dd the respondent err n ncudng n pettoner s
consodated ncome for 1932 and 1933. sub|ect to depeton, the sums of 25,727.63, 27, 21.09, and 0, 5.27
whch pettoner s affate, the Woford Producton Co., pad durng sad years to owners of o payment
contracts on Its Pnkston ease
1 Nonacquescence reates ony to the ssue nvovng the far market vaue, f any, of the scrp at the tme of
ts recept In 1936.
Nonacquescence reates to a ssues e cept the ssue wth resert to the 1.10 added by the Commssoner
to the pettoner s ta abe ncome.
7 Nonacquescence reates ony to the ssue, Shoud the ta abe ncome of the pettoner for the year 1935
be ncreased, for the reason that a certan oss sustaned durng that year by the partnershp, of whch he s
a member, resuted from the short sae of property, wthn the meanng of secton 117(e) of the Revenue
ct of 193 7
Nonacquescence reates ony to the Issue. Dd the Commssoner err n ncudng n gross estate the tota
agreed vaue of tbe two parces of rea property nvoved
G
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20
Nonacquescenceb Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
e et a., Maude ., e ecutors of estate of Ida .
Whte ;
ngham, Mary Ly (Fager), estate of
shop Trust Co., Ltd., e ecutor of estate of ohn
. McCandess
ase, . F
ake, oseph M., admnstrator of estate of arret
Frances Whtng
ok, Mary Louse 1
ondhoders Commttee .
onfs, F. G., estate of
onfs Trust, F. G W,-
onfs et a., een G., e ecutors of estate of . G.
onfs -
ranch, Caude R
rdgeport Cty Trust Co. et a., The, e ecutors of
estate of Noyes . ng
rsto, ennet .
rown, ntonette
rown, Wam Maynard
ruckhemer, Davd
ruckner, rnod
uck, sworth
urnett, O. L
urnqust, ert
C.
Caforna rewng ssocaton,
Cannon aey Mng Co
Carng odng Co.
Carro et a., ohn ., e ecutors of estate of Forence
L. Tsdae
Carte Ms, Inc
Caspersen, Freda R
Caughey, Caroyn G., estate of
Cavanagh, Pau (aso known as Wam G. tkn-
son).
Cavett et a., ., e ecutors of estate of W. T. aes6.
Centra anover ank Trust Co., e ecutor of
estate of W. M. L. Fske
Centra Loan Investment Co.7
Chamberan, Park
Chaparra O Co
Chase, Gertrude
Chase Natona ank of the Cty of New York,
The, trustee under agreements wth mercan
Depostor Corporaton
93575
9 985
979 3
9829
92817
105 65
90 52
90 86
90 87
91501
931 8
91501
9 2 8
87136
962S9
977 3
97836
1023 3
97507
93330
902 8
101259
101295
96330
86776
87378
. 88616
978 2
97698
92765
99655
95500
93208
102055
82565
88067
97552
97902
f 9385
I 93855
I 93856
93857
11
0
2
2

6
0
0
0
0
0
1
2
2

6
12
1
0
-1
.

1

2
0

2
0

39
1
3
1
1
1 Nonaoquescence reates ony to the Issue nvovng the queston of whether the ncome of the Caedona
Trust s ta abe to the pettoner, the grantor.
1 Nonacquescence reates to ssue pertanng to bases for deprecaton of pettoner s assets.
Prevous acquescence pubshed n Interna Revenue uetn 19 0-15, page 1, wthdrawn.
state ta decson.
Gft ta decson.
Nonacqucseonce s ony as to the ssue. Is the cash receved by pettoners n 1935 from the Loca Federa
Savngs and Loan ssocaton, whch s admtted to he ncome, ta abe as ordnary ncome or as capta
gan
cquescence pubshed n Cumuatve uetn 1939-2, page 6, wthdrawn.
G
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21
Nonacquescences Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
Ctzens State ank ( sworth, ans.)
Cark et a., W. ., e ecutors of estate of Chares C.
Ingas
Cary, P. T. (Patrck)
Cohen, Moses
Coby, nne
Coe, Rufus S ---
Cons, ames N., estate of
Coona Trust Co. et a., e ecutors
Coumba O fe Gas Co.1
Coumba Rver Paper Ms
Commerca Casuaty Insurance Co.
Commodore, Inc., The
Cook Drng Co.
Corporate Investment Co
Corpus Chrst Termna Co
Covngton et u ., George W
Credt ance Corporaton
Crchton, ate
Crown Zeerbach Corporaton, transferee.
Cushman, Louse C, transferee of estate of Mary
W. Cushman
Cushman, Mary W., estate of
D.
Daas Tte Guaranty Co.5...
Dauth et u ., ohn P
Davs et a., George P., e ecutors of estate of George
S. Fske
Davs et a., George P., e ecutors of estate of George
S. Fske.
Day, Gertrude uckne, estate of
Deerng, Frank C, estate of
Deerng et a., oseph Godfrey, e ecutors of the
estate of Frank C. Deerng
Deaware Termna Corporaton
DeLong, Davd . ...
Denhofn Mc ay Co
Denver Natona ank et a., trustees u/w F
onfs 7.
G.
106122
101717
96 96
9816
10 367
96589
106566
936 8
9062
977 0
97938
103639
102997
,103633
82231
78363
88103
98283
100561
97025
101161
101163
101166
101168
01170
92881
92882
92883
90 66
96882
. 96883
10368
10 0
1006
1006 5
95996
95996
86105
10126
89606
931 8
6
5
2

5
2
6
1
1
3
.3
5
6
38
0
38
2
2
2
3
0
0
0
2
5
5

0
0
0
3
39
0
1 Nonacquescence reates to ssue pertanng to aocat on of cost of equpment on the property n queston.
onacquescence reates ony to the ssue nvovng the retroactve appcaton of secton 270 of Chapter
of the Natona ankruptcy ct, effectve September 22, 1938, n estabshng the bass of property ac-
qured In 1936 n a reorganzaton under secton 77(b) of that ct.
1 Nonacquescence reates ony to the ssue whether the pettoner s entted to deduct the costs ncurred
n drng wes. Pror acquescences pubshed n Cumuatve uetn 1939-2, page 8, wthdrawn as to
ths ssue ony.
state ta decson.
Nonacquescence reates ony to the ssue nvovng the ta abty of an amount of 0,000 transferred
from Premum reserve account to Undvded profts account pursuant to resouton of the board
of drectors on uy 5. 193 .
Nonacquescence reates ony to the ssue nvovng the amount of gan recognzabe n 1936 upon the
recept of cash and stock n the Sundstrand Machne Too Co. for stock n the mercan roach Machne
Co.
Prevous acquescence pubshed n Interna Revenue uetn 19 0-15. page 1, wthdrawn.
G
e
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r
a
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d

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2
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1
3
-
0
1
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2
1

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:
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3
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6
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P
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/
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s
s
_
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#
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22
Nonacquf.scences Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
Dobson, ohn
Donahue, Mrs. esse W.1.
Dougas, esse P
Downng et u ., Rchard 2
Dunnng, enry .
Durkhemer, S. F
:.
dson ros. Stores, Inc.
dwards Drng Co. ..
as, dna .
mhrst, Dorothy Whtney.
ston Co., Ltd
verson Corporaton
y Trust, Donad
y Trust, Roand Tavor
:y, III, Trust, Wam Newbod
qutabe Lfe ssurance Socety of the Unted
States, The f
rb et a., rthur L., e ecutors of estate of Ges W.
Mead
states dmnstraton, Inc., admnstrator of
estate of Zachary Smth Reynods 7
vans, Mary Royd
vans, Mary .
oon Co., The
F. . . O Co..
Facon Co
Farmers Gnners Cotton O Co .
Fdety-Phadepha Trust Co. et a., trustees and
transferees of estate of Gertrude uckne Day 7_.
Fed, Ozro Mer, estate of 10
Frst Mortgage onds 11
Frst Natona ank fe Trust Co., of Mnneapos,
e ecutor of estate of ames N. Cons
106553
92980
102870
99171
92629
95209
/10 2
10 25
75931
90827
850 0
85880
95298
9660
93281
103 72
103 70
103 73
8929
, 93805
97566
86395
97 32
95527
101276
92960
92001
93 36
1006
/10500
1105005
90 52
90 86
90 87
106566
;

0
3
11
1
5
35
1
1
2
0

1


1
2
2
2
5
1
1
1

5
0
6
1 Nonacquescence reates ony to the ssue whether the Commssoner erred n ta ng the ncome of an
rrevocabe trust to the grantor, the pettoner.
Nonacquescence reates ony to the ssue whether Mrs. Irma Downng s abe for any part of the de-
fcency.
Nonacquescence reates ony to the Issue whether the pettoner s entted to deduct the costs ncurred
n drng o wes. Pror acquescence pubshed n Cumuatve uetn 1939-1 (Part 1), page 11, wth-
drawn as to ths Issue ony.
Nonacquescence reates ony to the ssue. Was the ncome resutng from the recept of surrendered
coatera n e tngushment of a debt persona hodng company ncome
1 Nonacquescence reates ony to the ssue. May the company, on a cash recepts and dsbursements bass,
deduct guaranteed nterest pad n the ta year under settement optons e ercsed by the benefcary, when
such Interest had accrued In pror years
Oft ta decson.
state ta decson.
Nonacquescence reates ony to the deductbty of attorney s fees and abstract fees ncurred ncdenta
to the estabshment of forfeture of a ease and obtanng repossesson of the eased premses.
Nonacquescence s ony wth respect to the transactons covered by paragraph 2(d) of the stpuaton.
Docket No. 105005, estate ta decson.
Nonacquescence reates to Issue pertanng to bases for deprecaton of pettoner s assets.
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23
NoN C st knces Contnued.
Ta payer.
Frst Trust Depost Co. et a ., guardans
Fske, George S., estate of
Fske, George S., estate of_.
Fske, W. M. L., estate of..
Femng, Mrs. nna Maud
Femng- mbe Corporaton
Femng, Wam 1
Forest Lawn Memora Park ssocaton
Fower et u ., ohn 0_
Frank Trust of 1927, Isaac
Frank, Wm. ., trustee of Isaac W. Frank Trust of
1927
Frazer, Frederc - -
Frost Co., G. C, a corporaton -- --.
Fud, Forentne M
Fud, Leonhard Fe ---
Gadan Co., Ltd
Gardner, . Ws _
Getz et u ., Oscar
Gannn et u ., . P
Gan, G. arod .
Gan, Lee . 7
Gan, Samue W. 7
Gmore. nna
Goss Gos , Lucy M.s
Godnamer et u ., Marcus S_
Goodman, dwn
Green, W. S.
907 9
90750
90751
10368
10 0
102055
92958
9 690
92959
92957
; 9 689
102989
91162
9827
9827
91 12
100
98206
98205
9( 05
92115
9511
87127
87128
1011 9
10 150
10 151
97835
90391 ,
f 97158
97160
87799
3786
6373
63 87
93 0
96315
97522
98077
105092
9 2
9 3
102689
102090
oard of Ta ppeas.
oume.
f102689
102090 f
II
T)
15

1
II
1
5
III


1

II

2
11
I
2
5
5
5

1
6
1
26
1
2
5

1
5
Greene, . Crawford, guardan of estate of ce
Lester 5
Greve, Wam M
Grffn, Wam
Grnne, Francs rowne 1
Grote et u ., en
Guaranty Trust Co. of New York, e ecutor of
estate of enry W. Putnam
state ta decson.
Nonacquescence s ony wth respect to the hodng that the pettoners woud reaze no ta abe Income
from the e change of ther o, equpment, and persona property nterest for contngent o payments unt
they recovered the cost of the e changed property from the o payments receved.
Nonacquescence reates ony to the Issue, Dd the e cess of far market vaue of the od budng at the
tme of e ecuton of the ease, and the far market vaue of the new budng at the tme of the canceaton
of the ease, consttute a proper offset to the cash receved Pror acquescence pubshed n Interna Reve-
nue uetn 19 1-33, page 1, wthdrawn.
Nonacquescence reates ony to the ssue, In the case of a gft of securtes n trust, shoud the trust be
treated as the donee, resutng n ony one e cuson, or shoud the benefcares be treated as donees, resutng
n one e cuson for each benefcary
1 Gft ta decson.
Un|ust enrchment ta decson.
T Nonacquescence reates ony to the ssue nvovng the treatment of wrapper e pense.
1 Pror acquescence pubshed n Cumuatve uetn II-1, page 6 (1933), revoked.
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2
Nonacquescencks Contnued.
Ta payer.
n.
ague, Mary Lews.
aes, George .1
aes, Mrs. Oneta1 -
aes, r., W.T. _
aes, W. T., estate of
awe, Water S
asev, Lan ohnson, e ecutr of estate of
Rchard emmons asey 1 ..
asey, Rchard emmons, estate of1
ardwck Trust, nta Mar|ory
ardwck Trust, Chares
ardwck, r., Trust, Gordon
ardwck Trust, Tavor
artford-Connectcut Trust Co., The. e ecutor of
estate of Mary W. Cushman 2
artman Tobacco Co., The
asketc Manufacturng Corporat on
eer, dward .
ercues Motor Corporaton
ckman, O. enneth
ghand, Cec ., e ecutor of estate of rg L.
ghand
ghand Farms Corporaton
ghand, rg L., estate of
Stores, Inc., . G
oboken Land Improvement Co...
offman, atherneM -
offman, W. W
offman et u ., W. W
oster, ohn _. -
ooper, ames P., estate of2S
ooper, Mathde ., admnstratr of estate of
ames P. ooper 25
opknson, esse
orner, ua C, e ecutr of estate of Wam
Macpherson orner 2
orner, Wam Macpherson, estate of
ughes Too Co
Ickehemer, Paune.
Ingas, Lews, transferee,
Ingas, Robert
T.
.
arvs, r., mus, guardan of Wam D. P.
arvs : ..
arvs, Wam D. P., an nfant
oard of Ta ppeas.
Docket
No.
oume.
Pag .
103355
93210
93209
93211
93208
5
0
0
0
0

10
12 5
12 5
12 5
12 5
102 70
7 0
96 0
96 0
103 69
103 7
103 71
103 68
2
2




607
607
370
370
370
370
92882
10 919
100271
/ 9 79
9 795
92225
103767
0
5

9 7
311
636

1020
0

998
12 2
98726
95690
98726
10520
102779
967 1
967 2
92 1
9 998
85776
3
2
3

6
598
131
598
1182
0
95
59

1
851
11
85776
9701
1
2
11
580
102931
102931
90002


0
1136
1136
962
103 25
101718
101719
5
5
5
78
787
787
99227
99227
3
3
36
39
Nonacquescence s ony as to the ssue, Is the cash receved by pettoners n 1935 from the Loca Federa
Savngs and Loan ssocaton, whch s admtted to be ncome, ta abe as ordnary ncome or as capta gan
1 state ta decson.
1 Nonacquescence reates to the ssue whether pettoner was ta abe on the ncome derved from certan
securtes paced In certan acency uccounts wth a bank n pettoner s name as trustee for hs mnor chdren
Nonacquescence reates to a ssues e cept the ssue. Dd the pettoner reaze ta abe gan as the resu
of recevng an award for compensatory damages
1 Nonacquescence reates ony to the Issue, Was the sum of 132,3 5.73, representng the net proceeds o
certan fe nsurance poces assgned by the decedent to a certan trust, propery ncudbe n the gross
estate; and, f so, may the sum of 0,000 be e cuded under the provsons of secton 302(g) of the Revenue
ct of I926T
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25
Nonacqutkhcknces Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
ewe Mnng Co 99266
ohnson Countv Reatv Co | 9631
ohnson, are F . 97388
f 86776
ohnson et a., Thomas M., trustees I 87378
I 88616
ohnston, atherne S. estate of1 , 8639
onas, Louse ; 91010
affe et a., arod, soe hers of estate of Leopod
affe
affe, Leopod, estate of1
ansas Cty, St. Lous Chcago R. . Co
atz et u ., Meyer
atznger Co., The dward
aufmann et u ., dmund I
aufmann, Sau
eogg, Cornea . W., e ecutr of estate of
Frederck R. eogg 1
eogg, F. W
eogg, Frederck R., estate of 1
enan et a., Wam R., r., trustees u/w Mary
Ly (Fager) ngham
ennedy Laundry Co
ennedy Mnng Mng Co
esebach et u ., enrv
an Co., . L.
rabe, ay
mbe, Mrs. ema
eberg, ce G. .
eberg, ce G. ., e ecutr of estate of Robert
. eberg, Sr.
eberg, Sr., Robert ., estate of - -
yce, . S., estate of
vce, M. P., admnstrator
napp. George O-
resge Department Stores, Inc
Lamm Lumber Co. ..
Lamont, zabeth .
Lane-Wes Co
L.
100526
100526
9 886
/10 007
(105511
102 21
/ 97157
97162
97161
891 3
95135
891 3
9 985
10 965
99507
98897
98691
f 92956
I 9 67
/ 92955
I 9 673
86178
86178
86179
9017
9017
91699
101906
10277
97 07
99829
1027 0-1
1
3

3
1
2
0


2
6

6
6
0
2
0
0
6
3


1
1
3
3
8
1
1
0

5
3
5
5

Lang et a., Francos 1027; 8 /
Larson, . ., estate of 8881 I
state ta decson.
1 Nonaequescence reates ony to the Issue, Dd the pettoner reaze ta abe neome upon the canceaton
of a porton of ts mortgage ndebtedness on certan property
1 Nonaequescence s ony wth respect to the hodng that the pettoners woud reaze no ta abe ncome
from the e change of ther o, equpment, and persona property nterest for contngent o payments unt
t y recovered tre cost of the e changed property from the o payments receved.
1 Nonaequescence reates ony to the ssue nvovng a bad-debt deducton of 201.ft).
1 Nonaequescence reates ony to the ssue whether 20,000 receved as damages fur bn ach of contract was
wruabe as ncome In 1935 or n 1936.
7 918 2 2
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26
Nonacquescences Contnued.
Ta payer.
Larson, Rose .1
Lester, ce ., an ncompetent, estate of 2
Lev, eanette
Lpe, Gordon C
Lpe, Suzanne
Lpe, r., Ward C
Ltte Gem Coa Co
M.
Magnus eck rewng Co., Inc
Ma|estc O Corporaton
Marborough ouse, Inc., et a.
Marborough Investment Co.
Marsha, erbert
Marsha, Margaret Whte (formery Margaret
Whte Wood)
Mason et a., Sam ., coadmnstrators of estate of
Sas . Mason
Mason, Sas ., estate of8
Masterson, nna za
McCandess, ohn ., estate of -.-
McCarthy, mmett .8
McCormack, Wam . ._
McGue, G. Percy, estate of
McGue, M. dth, e ecutr of estate of G. Percy
McGue
McGovern, Inc., Patrck
McGowan, Wam ohn, estate of, aso trust
e ecuted by 5 7-_
Mcntyre, Wnfred Wheeer
McLean et u ., Marrs s --
102876
96380
90 52
90 86
90 87
90 52
90 86
90 87
99559
969 8
1009
1009
93517
979 3
101607
9605
98 6
98 6
918 6
100967
103221
91170
L 91171
77 19
77 20
81391
81392
8680
86805
9 02
9 03
1 Nontequescence reates to a Issues e cept the ssue Invovng the deductbty of nterest n the amount
of 1,901.96.
Oft ta decson.
1 Nonacqufescence reates ony to the ssue. Is the pettoner entted to a 1935 oss deducton for the unde-
precated cost of certan casng and other ease equpment whch coud not be removed from a certan o
we whch the pettoner ceased to operate durng that year, because such operaton had become unproft-
abe
Nonacquescence reates to ssue pertanng to bases for deprecaton of pettoner s assets.
1 state ta decson.
Nonacqufescence reates ony to the deductbty of 17,8f 0 under secton 23(c) of the Revenue ct of
1936 for aeged oss of the pettoner s nterest n certan rea property.
1 Nonacqueseence reates ony to the ssue. Dd the Commssoner err In Incudng n gross estate the tota
agreed vaue of the tw parces of rea property Invoved
Pror acquescence pubshed n Cumuatve uetn 19 0-2, page 6, revoked n so far as t reates to the
ssue, Whether or not the pettoners are entted to deductons for percentage depeton based upon sums
receved by them pursuant to certan agreements wth the Guf Producton Co., and, f they are entted tu
depeton, shoud It be computed as a percentage of the gross proceeds from the sae of producton from the
propertes or as a percentage of the actua amount receved by the pettoners from the propertes
McLean et u ., Marrs 8_
Docket
No.
88813
93 0
t 96315
97159
90750
90751
907 9
101112
oard of Ta ppeas.
oume.

1
6
1

6
2
0
0
1
3
3
3
2
2

3
1
1
0
3
. .
1
1
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1
3
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0
1
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2
1

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:
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27
Nonacquescencks Contnued.
Ta| payer.
Docket
No.
oard of Ta ppeas.
oume.
Mead, Ges W., estate of 1
Merchants Natona ank of oston, The, e ecu-
tor of estate of Ozro Mer Fed
Merchants Natona ank of Mobe, The, trustee
for Merchants Natona udng Corporaton
Merchants Natona udng Corporaton, for-
mery Merchants Securtes Corporaton
Merdan Thrteenth eatv Co
Mesta, L. W - --
Mche, Morrs
Mchgan Sca Co
Mbank, Dunevy .
Mtche et u ., Chares F
Mtche, Wam ...
Mone Propertes, Inc -
Mooney ectrc Co.
Morehead, atharne oyd..
Morre, ohn dgcry, estate of
Mueer Co., C. F
Mutua Savngs Loan ssocaton, Inc., of Nor-
fok --.
N.
Natona ank of Commerce of Seatte
Natona ank of Topeka, ans., admnstrator of
estate of ohn dgery Morre.-
Natona Paper Products Co., transferor.
Nebraska rdge Suppy Lumber Co
Neson Co., N. 0
Neustadt et a., gnes, trustees u/w Sgmund
Neustadt
Neustadt, Sgmund, Trust under w of
New McDermott, Inc., The.. -
Newport Industres, Inc
Newton, r., ames
Newton Trust, ames --
Ncoa, arry T.
O.
Ortz, ce duPont .
Oswego Fas Corporaton s,
Pacfc Fush-Tank Co
Pacfc Grape Products Co.
Page O Co
97566
/10500
105005 f
99181 1
102155
/ 99181
102155
101968
96531
97311
96786
93050
102736
85612
103862
96072
95 1
103776
8596
. 96331
101321
89720
103776
101165
908 6
10 228
99935
99935
99360
92331
97325
9732
93821
. 98188
93159
10216
103787
97116
90515
9567
96186
1
5
15
5
1
2
3
II
1
5
5
5
2
2
3
0
I
0
3
3
III
5
13
3

1(1
12
12
12
2
6
. .
2
1
1 Gft ta decson.
1 Docket No. 105005, estate ta decson.
Nonacquescence s ony wth respect to the ta ahty of the Income from the so-caed short term trusts.
1 Nonacquescence reates ony to the ssue, Is the pettoner entted to a credt under secton 28(c)2
of the Revenue ct of 1938 In the amount of 13,810, representng 2 per cent of the argest amount of bonds
st any one tme outstandng durng 1936
1 cquescence as to one ssue pubshed n Cumuatve uetn 1939-2, page 28, wthdrawn.
Nonacquescence reates ony to the ssue, Is the Income of a trust pad to the pettoner s dvorced and
remarred wfe ta abe to hm, as the grantor
Nonacquescence reates to a ssues e cept the ssue, whether the pettoner s entted to any deducton
ss the resut of the satsfacton of the defct e stng n her husband s brokerage accounts at the end of the
year 193 .
Nonacquescence reates ony to the ssue nvovng the credt aowabe under secton 28(c) of the
Revenue ct of 1936.
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28
Nonacquescentes Contnued.
Ta payer.
Pamer, Careton
Paraport Theatre Leasng Corporaton
Parker, Shrey D., admnstrator of estate of . .
Larson
Paumgarten, se dde 1
Perkns, Raph 2
P- Group
Phoen State ank Trust Co., trustee under
deed of trust from Mary W. Cushman, as trustee
and transferee 3
Pedras Negras roadcastng Co
Permont Corporaton
Prce et u ., .
Prouty, Ove .1 -
Prudenta Fnanca Corporaton of uncy
Putnam, enry W., estate of
R.
Reaty Operators, Inc
Rebsamen Motors, Inc
Reynods, Inc., R. C.
Reynods, R. ., estate of
Reynods, Zachary Smth, estate of3
Rhodes, Mame D., estate of
Rhodes et a., ugh D., admnstrators of estate of
Mame D. Rhodes 3
Rchardson, Lunsford 1
Robnette, Meta dde 1
Ronrco Corporaton
Rosenhem, Carone
Ross, Frank W
Rowan Drng Co., transferee 5
Rubnsten, Wton 1
Rust, r., et a., . L., e ecutors of estate of . L.
Rust
Rust, . L., estate of
Safe Depost Trust Co. of atmore, trustee under
ws of R. . Reynods and atherne S. ohns-
ton, and deed of atherne S. ohnston
Sagnaw Manstee Lumber Co _.
Sanford Cotton Ms, Inc.
Santary Products Corporaton, The, transferor
Schmdapp, Car .1
Schwabacher, bert
Schwabacher, ames
Schwabacher, May
Schwabacher, Sophe D
oard of Ta ppeas.
Docket
No.
oume.
Pace.
8985
102062
0

1001
108
88S1
103010
96126
98835


1
3
109
701
1225
10 1
92883
970 5
100371
101260
9616
10563
/1026S9
102690
0
3
3

1
6
9 7
297
770
8
27
796
5
517
92387
99532
/ 9801
98017
8639
86395
9128
0

1051
36

356
2
2
1
1 5
1 5
62
9128
85905
103009
103859
10 97
91107
98532
95922
1
39


5


1
62
927
701
1130
1018
1
189
220
95880
95880
1
1
832
832
8639
103302
2
1 5
780
190
5 1
829
1177
1177
1177
1177
95218
101169
5
3
3
3
3
3
3
3
98895
100865
101269
10086
101268
Gft ta decson.
Nonacquesoence reates ony to the ssue, Dd the pettoner sustan a oss n the anont of 13,963.50
on the sae of second preferred and common stock of the I Cutch Machne fc Foundry Co.
state ta decson.
Nonacquesoence reates ony to the sse whether R. C. Reynods, Inc., reazed ta abe gan upon the
purchase of shares of Its own stock and contracts reated thereto n 1936.
Nonacquesoence reates ony to the ssue, Is the pettoner s transferor entted to depeton upon amounts
receved n 1932 from o payments acqured n 1931 for drng wes, the entre cost of whch was deducted
and aowed n ts 1931 ncome ta return
See O. C. M. 22 0 (pace 20 , Cumuatve uetn 19 0-2).
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39
NoN C sc NC Cunt n ted.
Ta payer.
Securty Four Ms Co., The
Seerev, ohn ---
Sheden Land Co. . --
Sherman, Dors ond -
Sherman, ohn ., estate of
Sherman, atherne M., survvng wfe of ohn ( .
Sherman - -
Sherman et a., atherne M., e ecutors of estate of
ohn . Sherman -
Skouras, Chares P
Skouras, Forence L_ _
Skouras, George P
Skouras, Spyros P
Smth, W. ncke
Sobe, Inc., N .-
Soomon, mea 1
Spor S Co., Inc., C.
Spreckes, doph
Sprngfed Industra udng Co., The__- ---
Stacy, Mar|ore Lpe --
Stanart Co., Ltd -
Stark, . . Luteher, e ecutor of estates of M. M.
Stark and W. . Stark
Stark, M. M., estate of -
Stark, W. ., estate of - ---
State-Panters ank Trust Co -- --
State Street Trust Co. et a., admnstrators of
estate of Francs rowne Grnne
Sten, Nathan -
Stem, son L. S. ---
Stmson M Co -
Straus, Fredrch
Straus, Meer --
Straus, Mortz- - -
Strong Manufacturng Co., The
Sun Ppe Lne Co
Sweet, Forence M -
Swope, Lorenzo W., estate of.
Docket
No.
90137
97673
93196
95300
1030 1
1030 1
1030 1
103610
103618
103009
103(111
( 93663
110288
93822
97937
903.
9 621
95639
87300
99 20
96606
1103807
103808
103807
103808
10525
10. 092
83178
9313
10 290
83181
83180
83179
95626
9876
101786
936 8
99262
.103 68-
f103 7
oard of Ta p cas.
oume.
5
3
L
1



5
5
5
5

0
3
0
1
38
3
2
5
5
5
5

0
0
6
0
11
2

1
3

Tayor et u ., arden F.
Tayor, Roand, trustee of nta Mar|ory ard-
wck Trust, Roand Tayor y Trust, Gordon .
ardwck, r., Trust, Donad y Trust, Wam
Newbod y, III, Trust, dares . ardwck
Trust, and Tayor ardwck Trust __.
1 Nonacquesoence reates ony to tht
oss on an aeged sae of certan and tc
Gft U decson.
1 Nonacquesoence reates ony to the year 1936.
Nonacquesoence reates ony to the Issue, re the profts derved by the ta payers durng Ihe ta abe
year from the sae of tmber sub|ect to ta as capta gans or as ordnary Income
state ta decson.
Nonacquesoence reates ony to the ssue, Where termnaton of a trust coud occur ony at the eecton
u the grantor wth concurrence of attorneys who represented two persons nterested n the trust, s the
nterest of the attorneys a substanta adverse nterest
Nonacquesoence reates ony to the ssue nvovng the e change In 1936 of M ) shares of Pressed Stee
Car Co. (S. .) tor stock and rghts In Pressed Stee Car Co. r a.
Issue whether |M ttoner s entted to a deducton for an asserted
another corporaton.
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30
Nonacqukscences Cont Inued.
Ta payer.
Techncraft ngneerng Corporaton
Thomas, Martn D
Thompson, Mary ., e ecutr of estate of Wam
G. Thompson 1
Thompson, Wam G., estate of 1
Totson, Frank F., estate of 1 5 - --
Totson et a., Isabee I., e ecutors of estate of
Frank F. Totson 12
Tsdae, Forence L., estate of
Ttus O Investment Co
Tobn Packng Co., Inc., The
Towne, Wam Stark
Traser, Rchard ., estate of 5
Transcafoma O Co., Ltd.
Trco Securtes Corporaton
The,
U.
Unon Trust Co. of the Dstrct of Coumba,
e ecutor of estate of Caroyn G. Caughey 1
U. S. Industra coho Co. (W. a.) 5
W.
Waker, Wam T.
Warner, ack L.
Washngton Pup Paper Corporaton, transferor-
Watson, rchbad R
Webster, . esser
Webster Trust, Fanne S
Webster Trust No. 1, Warren
Webster, r., et a., Warren, e ecutors of estate of
Warren Webster, Sr
Webster, r., et a., Warren, trustees of Fanne S.
Webster Trust
Webster, r., et a., Warren, trustees of Warren
Webster Trust No. 1
Webster, r., et nc., Warren
Webster, Sr., Warren, estate of
Wengarten, Inc., .
Wenstock, Ma .
Docket
No.
99830
10087
96358
96358
100563
100563
978 2
f 91993
9 877
99 83
99197
91958
73111
85176
99655
90713
9071
92600
97 01
10116
87873
880 8
89650
978 0
978 1
97837
97839
978 1
97837
97838
97839
99707
97312
oard of Ta ppeas.
oume.
5

1
1



2
3
2
1
37
-11

2
0
2
3
2









3
1 state ta decson.
1 Nonacquescence reates ony to the Issue, whether the pettoner has overcome the presumpton that
certan gfts made by the decedent to the natura ob|ects of hs bounty wthn one year of death were made
(n contempaton of death.
Nonacquescence reates ony to that part of the oard s opnon whu-n hods, wthout supportng
evdence, that gans on the sae of corpus of the estate consttuted ncome avaabe for dstrbuton to the
benefcares.
Pror parta acquescence pubshed n Interna Revenue uetn 19 1-38. page 1, revoked.
1 Nonacquescence reates ony to the ssue, Is the ta payer entted to a deducton for rent pad for the
use of vesses of a subsdary whch t operated under a contract provdng that t shoud mantan the
vesses and make good deprecaton
Oft ta decson.
1 Nonacquescence reates to the ssue whether pettoner Is entted to a dvdends pad credt of 27,sn
representng premums In new preferred stock and cash on od preferred stock retred n connecton wth
a nonta abe reorganzaton In so far as the ssue was decded aganst the Commssoner.
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31
NoN C Unwc Ncss Contnued.
Ta payer.
Wenger, Mary .1
West Producton Co
Western d|ustment Inspecton Co
Western Wa ed Paper Co. of Caforna, transferor.
Wether, Samue Prce, e ecutor of the estate of
Gertrude uckne Day
Wheeer, een vans
Wheeer, Robert T
Whte, Ida ., estate of -
Whtng, arret Frances, estate of
Wco , se . ..- -
Wco , Gayord P.
Wco , Lucan T
Wco , Mabe I. .
Wson, Frances S
Wmore Steamshp Co
Wson, ohn P. -
Wood, Orrn G. --
oard of Ta ppeas.
Docket
No.
oume.
Page.
922 5
2
225
88997
1
10 3
100778
5
721
101167
3
5 1
1006 5

52
95528
2
2 6
103222
5
67
93575
1
525
92817

1306
96830
3
931
96831
3
931
80393

373
96827
3
931
99980

583
10 508
5
225
931 0
2
1260
92 89
0
90
1 Nonacquescence reates ony to the Issue, If the ncome of the trust s ta abe to the grantor, are the osses
sustaned by the trust deductbe by her Nonacquescence pubshed n Cumuatve uetn 19 0-2. page
1 . wthdrawn n so far as It reates to the ssue, Is the oss sustaned on capta assets beongng to the trust a
capta or ordnary oss
1 state ta decson.
1 Nonacquescence reates ony to the deductbty of attorney s fees and abstract fees ncurred ncdenta
to the estabshment of forfeture of a ease and obtanne repossesson of the eased premses.
Nonacquescence reates ony to the ssue. re the pettoners ta abe n 1935 as benefcares un-
der the w of mma Lyman Wco upon ncome earned n 1935 by the estate durng admnstraton
1 Nonacquescence reates to the ssues, Whether the ncome of a 2-year trust created for the beneft of
the ta payer s adut son s ta abe to the grantor under secton 166 of the Revenue ct of 193 , and whether
the capta gans of a fetme trust created for the beneft of an adut daughter are ta abe to the grantor
under secton 167 of the Revenue ct of 193
Gft ta decson.
Nonacquescence reates ony to the ssue, Is the vaue of fe nsurance poces to be determned by the
cost to purchase smar contracts as determned by the Commssoner, or s the vaue mted to the cash
furre der vaue as contended by pettoner
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INCOM T RULINGS. P RT I.
. INT RN L R NU COD .
C PT R L INCOM T .
SU C PT R . G N R L PRO ISIONS.
P RT II. COMPUT TION OF N T INCOM .
S CTION 22(a). GROSS INCOM : G N R L
D FINITION.
Secton 19.22(a)-1: What ncuded n gross 19 2-8-10996
ncome. I. T. 3532
INT RN L R NU COD .
The amount receved by an empoyee as the resut of an award
by the Natona Labor Reatons oard on account of hs beng ds-
charged In voaton of the Natona Labor Reatons ct ( 9 Stat.,
9) consttutes ncome to the recpent. S. S. T. 359 (C. .
1939-1 (Part 1), 305), hodng that such an amount does not con-
sttute wages under Ttes III and I of the Soca Securty
ct, s not governng n determnng whether such an amount con-
sttutes Income.
dvce s requested whether the amount receved by n accord-
ance wth a decson of the Natona Labor Reatons oard repre-
sents ncome sub|ect to Federa ncome ta n vew of S. S. T. 359
(C. . 1939-1 (Part 1),305).
The M Company and the N Company were merged and thereafter
severa of ther empoyees were dscharged. The Natona Labor
Reatons oard nsttuted proceedngs aganst the two companes
aegng voaton of the Natona Labor Reatons ct ( 9 Stat.,
9) n dschargng and certan other empoyees for unon actvty.
The acton was brought by the Government wth the O ssocaton
as an ntervenng party. The Natona Labor Reatons oard
found the defendants guty of voatng the aw and ts decson
was uphed by the courts. It was ordered that and severa others
be renstated n ther postonS| and that they be compensated for any
oss sustaned by reason of havng been dscharged. The M Company
pad the amount of doars, whch represented the dfference
between the amount woud have receved had he remaned n the
company s empoyment and the amount he dd receve n wages or
earnngs from other sources durng the perod he was not empoyed
by the company.
Secton 22(a) of the Interna Revenue Code, as amended, defnes
the term gross ncome to ncude gans, profts, and ncome derved
from saares, wages, or compensaton for persona servce, of what-
(33)
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19.22(a)-2. .
3
ever knd and n whatever form pad, or from professons, vocatons,
trades, busnesses, commerce, or saes, or deangs n property,
whether rea or persona, growng out of the ownershp or use of or
nterest n such property; aso from nterest, rent, dvdends, secur-
tes, or the transacton of any busness carred on for gan or proft,
or gans or profts and ncome derved from any source whatever.
It s hed that the amount of doars receved by from the M
Company shoud be ncuded n gross ncome. (See II. Lebes Co.
v. Commssoner, 90 Fed. (2d), 932.) The fact that n S. S. T. 359.
supra, t was hed that such payments do not consttute wages
wthn the meanng of Ttes III and I of the Soca Securty
ct s mmatera to the queston here at ssue. There the term
wages s defned as a remuneraton for empoyment and the
term empoyment s defned as any servce, of whatever nature,
performed wthn the Unted States by an empoyee for hs em-
poyer. The term gross ncome n the Interna Revenue Code
s broad enough to ncude amounts whch may not be strcty
wages wthn the defnton of that term contaned n the Soca
Securty ct.
Secton 19.22(a)-2: Compensaton for persona 19 2-20-11101
servces. T. D. 5151
TITL 26 INT RN L R NU . C PT R I, SU C PT R . P RT 19
INCOM T .
mendng secton 19.22(a)-2 of Reguatons 103 reatve to
compensaton for persona servces.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
Secton 19.22(a)-2 of Reguatons 103 Part 19, Tte 26, Code
of Federa Reguatons, 1910 Sup. s amended by addng to the end
thereof a new paragraph readng as foows:
The vaue of servces need not be ncuded n gross ncome when rendered
drecty and gratutousy to an organzaton descrbed n secton 23(o). Where,
however, pursuant to an agreement or understandng servces are rendered to a
person for the beneft of an organzaton descrbed n secton 23(o) and an
amount for such servces s pad to such organzaton by the person to whom
the servces are rendered, the amount so pad consttutes Income to the person
performng the servces even though at the tme of the agreement or understand-
ng the person makng the payment acknowedges hs abty to make payment
to such organzaton. The second sentence of ths paragraph sha not appy
where such an agreement or understandng has been entered nto pror to May
1 , 19 2 (the date of the approva of Treasury Decson 5151).
(Ths Treasury decson s prescrbed pursuant to sectons 22 and
02 of the Interna Revenue Code (53 Stat, 9, 32. 26 U. S. C, 19 0 ed.,
22,62).)
Norman D. Canst,
ctng Commssoner of Interna Revenue.
pproved May 1 , 19 2.
ohn L. Suv an,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster May 15, 9 2, 3.33 p. m.)
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35
19.22(b)(3)- .
Secton 19.22(a)-7: Gross ncome of farmers.
INT RN L R NU COD .
Penates under grcutura d|ustment ct of 1938, as amended,
deducted and pad by purchaser of crop. (See I. T. 3530, page 3.)
S CTION 22(b). GROSS INCOM : CLUSIONS
FROM GROSS INCOM .
Secton 19.22(b) (2)-2: nnutes:
Redeposts to retrement fund by renstated cv servce empoyees.
(See I. T. 35 5, page 9.)
Treatment for Federa Income ta purposes of (1) an amount
receved under the provsons of the Cv Servce Retrement ct,
as amended by the ct of une 22, 193 ( 8 Stat., 1201), upon the
death of a cv servce empoyee of the Unted States who was not an
annutant at the tme of hs death, and (2) saary of the decedent
for the ta abe perod pror to hs death.
dvce s requested wth respect to the treatment for Federa
ncome ta purposes of (1) an amount receved under the prov-
sons of the Cv Servce Retrement ct, as amended by the ct
of une 22, 193 ( 8 Stat.. 1201), upon the death of a cv servce
empoyee of the Unted States who was not an annutant at the tme
of hs death, and (2) saary of the decedent for the ta abe perod
pror to hs death.
The Unted States Cv Servce Commsson states that at the tme
of the decedent s death on ugust , 19 1, he had standng to hs
credt n the Cv Servce Retrement and Dsabty Fund the sum
of 12a; doars, whch represented hs retrement contrbutons nto
the fund durng the course of hs empoyment, and that to ths amount
was added 5 doars, nterest computed thereon, makng a tota of
17a; doars due hs estate. Payment was made to the admnstratr
of the decedent s estate by check dated October , 19 1.
Secton 12(d) of the Cv Servce Retrement ct, as amended
by the ct of une 22,193 ( 8 Stat., 1201), reads as foows:
(d) In case an empoyee sha de wthout havng attaned egbty for
retrement or wthout havng estabshed a vad cam for annuty, the tota
amount of hs deductons wth nterest thereon sha be pad, upon the estabsh-
ment of a vad cam therefor, n the foowng order of precedence:
Frst, to the benefcary or benefcares desgnated n wrtng by such empoyee
and recorded on hs ndvdua account;
Second, f there be no such benefcary, to the duy apponted e ecutor or
admnstrator of the estate of such empoyee;
INT RN L R NU COD .
Secton 19.22(b) (3)-: Gfts and bequests.
( so Secton 2, Secton 19. 2-1.)
19 2-2 -11122
I. T. 3557
INT RN L R NU COD .
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I 19.22(b)(3)- .
36
Thrd, If there be no such benefcary, or e ecutor or admnstrator, payment
may be made, after the e praton of 30 days from the date of the death of the
empoyee, to such person or persons as may appear n the |udgment of the Cv
Servce Commsson to be egay entted thereto, and such payment sha be a
bar to recovery by any other person.
Secton 12(f) of the Cv Servce Retrement ct, as amended,
reads as foows:
ach empoyee or annutant to whom ths ct appes may, under reguatons
prescrbed by the Cv Servce Commsson, desgnate a benefcary or bene-
fcares to whom sha be pad, upon the death of the empoyee or annutant
any sum remanng to hs credt (Incudng any accrued annuty) under the
provsons of ths ct.
Secton 22(b)3 of the Interna Revenue Code provdes for the
e cuson from gross ncome and the e empton from ta aton of:
(3) Gfts, bequests, and devses. The vaue of property acqured by gft,
bequest, devse, or nhertance .
Where, under the provsons of the Cv Servce Retrement ct,
as amended, a benefcary, dstrbutee, or ne t of kn receves any part
of the amount standng to the credt of a deceased empoyee, such sum
s e empt from Federa ncome ta under the provsons of secton
22(b)3 of the Interna Revenue Code, supra. (See I. T. 2959, C. .
-1, 88 (193G).) The aggregate of the deductons from the de-
cedent s saary n the sum of 12 doars s, therefore, not sub|ect to
Federa ncome ta n the hands of any such recpent. It s aso not
ta abe as ncome to the decedent s estate snce t passes to the estate
as corpus, havng been ta ed (or requred to be ta ed) to the empoyee.
(See T. D. 3112, C. . ,76 (1921).)
Secton 2(a) of the Interna Revenue Code, as amended, reatng
to the perod n whch tems of gross ncome are ncuded, provdes
n part as foows:
(a) Genera Rue. The amount of a tems of gross ncome sha be Incuded
In the gross ncome for the ta abe year In whch receved by the ta -
payer . In the case of the death of a ta payer there sha be In-
cuded In computng net ncome for the ta abe perod In whch fas the date
of hs death, amounts accrued up to the date of hs death f not otherwse
propery ncudbe n respect of such perod or a pror perod.
In the nstant case, the nterest n the amount of doars had not
been paced to the credt of the empoyee pror to hs death, and even
though t accumuated over the perod n whch the deductons were
made, t was not propery ncudbe n respect of any ta abe perod
pror to 19 1. It s hed, therefore, that the nterest s ta abe ncome
to be ncuded n computng the net ncome of the decedent for the
ta abe perod ended wth the date of hs death. (Cf. O. D. 823, C. .
, 77 (1921).) It foows that to a benefcary, dstrbutee, or ne t of
kn the amount of such nterest s e empt under the provsons of
secton 22 (b) 3 of the Interna Revenue Code, supra.
The saary of the decedent, ncudng the deductons therefrom, for
the ta abe perod pror to hs death s, ke the nterest, ta abe ncome
ncudbe n the return requred to be fed for the decedent for the
ta abe perod ended wth the date of hs death, . e., anuary 1,19 1,
to ugust , 19 1.
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37
19.22(b) ( )- .
Secton 19.22(b) ( )- : Interest upon Unted
States obgatons.
19 2-1-109 5
Mm. 5299
Ta abe and e empt status under Federa ncome ta aws of n-
terest on Unted States savngs bonds ssued (1) pror to March 1,
19 1, and (2) on and after March 1, 19 1.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Ya) h ngton, D. C, December 17,19 f.
Coectors of Interna Revenue, Interna Revenue gents n Charge,
and Others Concerned:
1. The ssuance of Unted States savngs bonds s authorzed by
the Second Lberty ond et as amended. For the purpose of deter-
mnng ta es and ta e empton, the aw provdes that the ncrement
n vaue represented by the dfference between the prce pad for
Unted States savngs bonds and the redempton vaue receved there-
for (whether at or before maturty) sha be consdered as nterest.
UNIT D ST T S S INGS ONDS ISSU D PRIOR TO M RC 1, 19 1.
2. Under e stng aw nterest on Unted States savngs bonds
ssued pror to March 1,19 1, s e empt from ncome or profts ta es
now or nereafter mposed by the Unted States e cept surta es, e cess-
profts and war-profts ta es, and s e empt from such e cepted ta es
to the e tent of nterest on a prncpa amount of bonds not n e cess
of 5,000 (ncudng other bonds owned by the ta payer whch were
ssued under the authorty of the Second Lberty ond ct, as
amended). There s no war-profts ta now mposed by the Unted
States to whch such nterest s sub|ect. The decared vaue e cess-
profts ta and the e cess-profts ta now mposed by the Unted States
and to whch such nterest s sub|ect are appcabe ony to
corporatons.
3. Ta payers may seect each year the bonds ssued pror to March 1,
19 1, comprsng the prncpa amount of 5,000, the nterest from
whch they desre to treat as ta -e empt ncome for the year under
consderaton. The bonds seected may therefore consst of Unted
States savngs bonds and Tvasury bonds ssued pror to March 1,
19 1, a of whch bonds were ssued under the authorty of the Second
Lberty ond ct. as amended.
. In determnng whether the sad prncpa amount of such bonds
ssued pror to March 1, 19 1, owned by a ta payer s wthn or n
e cess of 5,000. the ssue or purchase prce ony s consdered as
prncpa of Unted States savngs bonds and not the maturty vaue.
UNIT D 8T T S S INGS ONDS ISSU D ON ND FT R M RC 1, 19 1.
5. Under the provsons of the Pubc Debt ct of 19 1 nterest
on Unted States savngs bonds ssued on and after March 1, 19 1,
ncrement n vaue as nterest.
seecton of bonds.
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I 19.22(b)( )- .
3S
s not e empt from ncome or profts ta es now or hereafter mposed
by the Unted States. The e empton descrbed n paragraph 2 of
ths mmeograph does not appy to the nterest (ncrement n vaue)
on Unted States savngs bonds ssued on and after March 1, 19 1.
M T OD OF R PORTING INT R ST.
6. very person ownng Unted States savngs bonds s requred
by aw to submt n hs Federa ncome ta return a statement show-
ng the amount of such obgatons owned by hm and the ncome
receved therefrom n such form and wth such nformaton as the
Commssoner may requre.
7. (a) Ta payers who reguary empoy the cash recepts and ds-
bursements method of accountng shoud return the nterest (ncre-
ment n vaue) on Unted States savngs bonds as ncome (ta abe
or e empt), for Federa ncome or profts ta purposes, for the ta
year n whch payment of the redempton vaue of the bonds s
receved (whether before or at maturty); provded, however, that
n the case of the death of a ta payer the nterest (ncrement n
vaue) earned up to the date of hs death sha be returned as ncome
for the ta abe perod n whch fas the date of hs death.
(b) For a ta abe year begnnng after December 31, 19 0, a ta -
payer who makes hs ncome ta returns on the cash recepts and ds-
bursements bass may eect n hs return to treat the nterest (ncre-
ment n vaue) on nonnterest-bearng obgatons ssued at a dscount
as ncome receved n such ta abe year. ta payer makng such
an eecton s requred to report n hs return for the year of the
eecton the nterest (ncrement n vaue actuay fang wthn the
year) and the tota of the ncreases n redempton vaue occurrng
between the date of hs acquston of the bonds and the begnnng
of such year. If any such eecton s made wth respect to any such
obgaton, t sha appy aso to a such obgatons owned by the
ta payer at the begnnng of the frst ta abe year to whch t appes
and to a such obgatons thereafter acqured by hm and sha be
bndng for a subsequent ta abe years, uness upon appcaton by
the ta payer the Commssoner permts hm, sub|ect to such cond-
tons as the Commssoner deems necessary, to change to a dfferent
method.
ampe: ohn Doe makes hs ncome ta return on the caendar
vear bass and computes hs net ncome on the cash recepts and ds-
bursements bass. e purchased the foowng bonds nonnterest-
bearng obgatons ssued at a dscount:
I. Unted States savngs bonds havng a maturty vaue of 10,000.
bearng ssue date of une 1, 1938, for 7,500.
II. Unted States defense savngs bonds. Seres , havng a
maturty vaue of 5,000, bearng ssue date of une 1. 19 1, for 3,750.
III. Unted States savngs bonds. Defense Seres F, havng a
maturty vaue of 10,000, bearng ssue date of December 1, 19 1,
for 7, 00.
In hs return for 19 1 ohn Doe eects to treat the ncreases n the
redempton prces as ncome. The amount of nterest (ncrement n
vaue) he woud report for 19 1 (and for 19 2 and 19 3 f there s
no change n hs hodngs) s as foows:
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39
19.22(b) ( )- .
19 1
19 2
19 3
onds owned by ta payer a nonntcr-
e t-bearng obgatons ssued at ds-
count.
Sub|ect to-
Sub|ect to-
Sub|ect to-
Norma
ta .
Surta .
Norma
ta .
Surta .
Norma
ta .
Surta .
f 10.000 Unted States savngs bonds (ssue
date une 1,1938) for 7,500
None
None
None
200.00
None
None
None
50.00
20.00
66.67
50.00
20.00
None
50.00
70.00
66.67
50.00
70.00
5,000 Unted States defense savngs
bond . Seres (Issue date une 1,19 1)
for 3,750
10,000 Unted Stntes savngs bonds. De-
fense Seres F (ssue date December 1,
19 1), for 7, 00
Tota
None
200.00
70.00
136. 67
120.00
ISO. 67
1 Interest (ncrement n vaue) on prncpa amount of 5,000s totay e empt for reason stated n paragraph
2; therefore, nterest fncrease n vaue as shown by redempton tabe appearng on face of bond) sub|ect
to surta ony s wth respect to prncpa amount (purchase prce) n e cess of 5,000. Purchase prce of
7,500 ess 5,000 equas 2,500 n purchase prce of bonds havng a maturty vaue of 3,333.33. It w be
noted that on the bass of the redempton tabe appearng n the bond there woud be an ncrement n
vaue of 200 as of December 31,19 1.
The e empton descrbed n paragraph 2 of ths mmeograph does not appy to the nterest (ncrement n
vaue) on Unted States savngs bonds ssued on and after M rch 1,19 1.
8. Ta payers who reguary empoy the accrua method of account-
ng shoud return the nterest (ncrement n vaue) on Unted States
savngs bonds as ncome (ta abe or e empt), for Federa ncome or
profts ta purposes, for each ta year when and to the e tent that
t s earned durng the year accordng to the terms of the bonds and
n the amount ndcated n the tabe of redempton vaues shown
thereon.
9. Mmeograph 518 (C. . 19 1-1, 197) s revoked. Inqures
regardng ths mmeograph shoud refer to the number thereof and
the symbos IT: TM.
Guy T. everng,
Commssoner.
Secton 19.22(b) ( M: Interest upon Unted 13 2-11-11023
States obgatons. I. T. 3538
INT RN L R NU COD .
Interest whch accrued on Treasury notes of Ta Seres -19 3,
-19 3, -19 , and -19 , after purchase consttutes ta abe n-
come, for Federa ncome ta purposes, ony when constructvey
receved by the purchaser or hs estate through acceptance of the
notes and accrued nterest thereon by a coector of nterna revenue
n payment of Federa ncome, estate, or gft ta es. Ths rue s
equay appcabe whether the purchaser or hs estate makes re-
turns on the cash recepts and dsbursements bass or on the accrua
bass.
ny nterest reazed whch had accrued on the notes when they
were purchased, and was ncuded n the purchase prce thereof, s
not ncome to the purchaser or hs estate but s a recovery of capta.
dvce s requested reatve to the proper treatment, for Federa
ncome ta purposes, of nterest whch accrued on Treasury notes of
Ta Seres -19 3, -19 3, -19 , and 13-19 .
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19.23(a)-.
0
The notes are sod at par and accrued nterest, one (caendar)
month s nterest beng added to par each month after ugust, 19 1, n
the case of Treasury notes of Ta Seres -19 3 and -19 3, and after
anuary, 19 2, n the case of Treasury notes of Ta Seres -19
and -19 , and the tota (of par and such accrued nterest at the
tme of purchase) s the purchase prce, or cost, of the note. The
notes w be redeemed for cash at the purchase prce at or before
maturty. Ta Seres -19 3 and -19 3 notes w mature ugust
1.19 3, and Ta Seres -19 and -19 notes w mature anuary
1.19 . The notes may be accepted n payment of ncome ta es (cur-
rent and back persona and corporaton ncome ta es, and e cess
profts ta es), and estate and gft ta es (current and back) at par and
accrued nterest to the month, ncusve, n whch presented (but no
accrua beyond the maturty date). Secton 71.1 of Treasury De-
cson 5109 page 359, ths uetn provdes that The notes may be
accepted ony n payment of ncome, estate, and gft ta es (current
and back) due from the orgna purchaser thereof or hs estate.
The purchaser of such notes w not be entted to any nterest thereon
after purchase uness the notes are used for the purpose stated. c-
cordngy, no nterest w accrue on the notes after ther purchase
uness and unt they are accepted n payment of Federa ncome,
estate, and/or gft ta es, owed by the purchaser or hs estate.
In vew of the foregong, t s hed that nterest whch accrued
on Treasury notes of Ta Seres -19 3, -19 3, -19 , and -19 ,
after purchase consttutes ta abe ncome, for Federa ncome ta
purposes, ony when constructvey receved by the purchaser of
the notes or hs estate through acceptance of the notes and accrued
nterest thereon by a coector of nterna revenue n payment of
Federa ncome, estate, or gft ta es, owed by the purchaser or hs
estate. Ths rue s equay appcabe whether the purchaser or hs
estate makes returns on the cash recepts and dsbursements bass
or on the accrua bass. In the case of the former, such nterest
s receved, n effect or constructvey, by beng apped n payment
of ta es owed, and n the case of the atter such nterest accrues
when so apped but not unt then.
ny nterest whch had accrued on the notes when they were
purchased, and whch was ncuded n ther purchase prce, s not
ncome to the purchaser or hs estate n any event, . e., whether
reazed through cash redempton of the notes or through ther
acceptance n payment of ta es, but when reazed s a recovery
of that part of the capta nvested n the notes.
S CTION 23(a). D DUCTIONS FROM GROSS
INCOM : P NS S.
Secton 19.23 (a)-: usness e penses.
INT RN L R NU COD .
mount of speca ta mposed on con-operated amusement and
gamng devces pad by owner of devce to occupant of premses,
on whch devce s ocated. (See I. T. 3539, page 71.)
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1
19.23(a)- .
Secton 19.23(a)-: usness e penses. 19 2-13-11035
( so Secton 23(1), Secton 19.23(1)-1.) I. T. 95 1
INT RN L R NU COD .
Rura ma carrers may not be aowed, for Federa Income ta
purposes, a mnmum deducton of 5 cents a me for the use of ther
automobes n the devery of ma. vdence to support deductons
coverng busness e penses and deprecaton wth respect to such
use s requred.
dvce s requested regardng the aowance for Federa ncome ta
purposes of a unform mnmum deducton of 5 cents a me to cover
the e pense of operaton and mantenance of automobes owned and
used by carrers on rura ma routes.
It s stated that the Post Offce Department makes an aowance of
5 cents a me for the mantenance of automobes used n deverng
ma, and that ths aowance was f ed after e tensve hearngs before
Congressona commttees and consderaton of evdence submtted to
prove that the actua cost of mantenance s n e cess of 5 cents a me.
The ureau s requested to permt a mnmum deducton of 5 cents a
me wthout the necessty of provng the e penses actuay ncurred.
Request s aso made that any carrer who presents facts to |ustfy a
greater aowance be permtted to deduct such amount.
Secton 22(a) of tre Interna Revenue Code provdes n part that
gross ncome ncudes gans, profts, and ncome derved from saares,
wages, or compensaton for persona servce, of whatever knd and n
whatever form pad, or from professons, vocatons, trades, or bus-
nesses, etc., and ncome derved from any source whatever. Under
ths genera defnton, the amount of 5 cents a me pad by the Post
Offce Department to a rura ma carrer for the mantenance of hs
automobe used n carryng on hs busness s ncudbe n gross
ncome for Federa ncome ta purposes.
Secton 23(a) 1 of the Code provdes n part that n computng net
ncome there sha be aowed as deductons a the ordnary and
necessary e penses pad or ncurred durng the ta abe year n carry-
ng on any trade or busness. Secton 19.23(a)- of Reguatons 103
provdes n part that among the tems ncuded n busness e penses
are operatng e penses of automobes used n the ta payer s trade or
busness. Secton 23(1) of the Code provdes n part for the deducton
of a reasonabe aowance for the e hauston, wear and tear of prop-
erty used n the trade or busness. Secton 19.23 (1) 5 of Reguatons
103 provdes, however, that the burden of proof w rest upon the
ta payer to sustan the deducton camed. These provsons of aw
and reguatons gve to the ta payer the rght to deduct a e penses
and a reasonabe amount of deprecaton ncurred n connecton wth
the operaton of hs automobe n the performance of hs dutes as a
rura ma carrer durng the ta abe year. though the Code pro-
vdes for deductons of busness e penses and deprecaton, the amount
of each camed deducton to be aowed s a queston of fact whch
must be supported by proper evdence that the amount camed was
actuay pad or ncurred n the ta abe year n connecton wth the
carrers busness. It s the cear ntent of the aw and reguatons
that ony those deductons whch, the ta payer s abe to prove may he
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I 19.23(a)- .
2
aowed, and, therefore, no f ed mnmum amount may be recognzed
as an aowabe deducton.
In vew of the foregong, t s hed that rura ma carrers may not
be aowed a mnmum deducton of 5 cents a me for the use of ther
automobes for busness purposes; and that deductons camed must
be supported by proper evdence.
Secton 19.23(a)-: usness e penses. 19 2-21-11103
I. T. 3551
INT RN L R NU COD .
Lega e penses ncurred by a State hghway empoyee In de-
fendng hmsef aganst charges preferred aganst hm for mproper
potca actvtes n voaton of the atch ct do not consttute
aowabe deductons as ordnary and necessary busness e penses
under secton 23(a) of the Interna Revenue Code.
dvce s requested whether ega e penses ncurred by a State
hghway empoyee under the crcumstances herenafter stated con-
sttute aowabe deductons for Federa ncome ta purposes as
ordnary and necessary busness e penses.
The ta payer, a cv engneer, has been empoyed by a State hgh-
way dvson for many years. In 19 1 he receved a etter from the
Unted States Cv Servce Commsson reatve to charges that
had been preferred aganst hm for mproper potca actvtes n
voaton of the atch ct. The ta payer dened the charges
and retaned an attorney to defend hm. For such servces, he pad
doars n 19 1. The ta payer states that f he s convcted, he may
be dsmssed from hs poston wth the hghway dvson.
Secton 23(a) of the Interna Revenue Code provdes that n
computng net ncome there sha be aowed as deductons:
the ordnary and necessary e penses pad or ncurred durng
the ta abe year n carryng on any trade or busness . Itacs
supped.
In ornhauser v. Unted States (276 U. S., 1 5, T. D. 222, C. .
TI-2, 267 (1928)) the Supreme Court of the Unted States hed
that where a former partner sued hs copartner for an accountng of
the recepts of a dssoved partnershp and the sut was successfuy
defended, the copartner may be aowed the deducton of attorney s
fees ncurred n the defense of the sut. The opnon of the Court
reads n part as foows:
The Soctor of Interna Revenue n a recent opnon has hed that ega
e penses ncurred by a doctor of medcne n defendng a sut for mapractce
were busness e penses wthn the meanng of the statute. In the course of
the opnon t was sad that such e pendtures were as much ordnary and
necessary busness e penses as they woud be f made by a ma reant n de-
fendng an acton for persona n|ures caused by one of hs devery automobes,
and that n the atter case the deducton woud be aowed wthout queston.
(C. . -, page 226 (1026).)
The bass of these hodngs seems to be that where a sut or acton aganst
a ta payer s dredy connected wth, or. as otherwse sated pro -
matey resuted from, hs busness, the e pense ncurred s a busness e pense
wthn the meanng of secton 21 (a), subdvson (1), of the ct Revenue
ct of 1918 . These rungs seem to us to be sound and the prncpe upon
whch Ihey rest covers the present case. Itacs supped.
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19.23(a)-.
The above-quoted anguage of secton 23(a) 1 of the Interna
Revenue Code s the same as that of secton 21 (a) 1 of the Revenue
ct of 1918 nvoved n the ornhauser case.
In order to be deductbe for Federa ncome ta purposes, the
e penses ncurred by the ta payer n the nstant case, n defendng
hmsef aganst the charges preferred aganst hm, must fa wthn
the provsons of secton 23(a) 1 of the Interna Revenue Code, supra.
Such charges, however, dd not arse out of the ta payer s
busness as a cv engneer empoyed by the State hghway dvson.
The proceedng n whch he s a defendant s nether drecty con-
nected wth, nor dd t pro matey resut from, hs busness. (See
ornhauser v. Unted States, supra.) It s hed, therefore, that the
ega e penses ncurred by the ta payer n defendng hmsef aganst
the charges referred to heren do not consttute aowabe deductons
n hs Federa ncome ta return for 19 1. (See aso Loyd v. Com-
mssoner, 55 Fed. (2d), 812, Ct. D. 5 2, C. . I-2, 268 (1932).)
Secton 19.23(a)-: penses of farmers. 19 2-7-10989
( so Secton 22(a), Secton 19.22(a)-7.) I. T. 3530
INT RN L R NU COD .
The so-caed penates Incurred and pad by producers under the
grcutura d|ustment ct of ) 8, as amended, upon the market-
ng of certan crops n e cess of the farm marketng quotas, are
deductbe under secton 23(a) of the Interna Revenue Code as
ordnary and necessary e penses by the producers who are requred
to pay suc penates. Where, however, the penaty s pad by the
purchaser and deducted from the purchase prce of the crop, the
producer shoud ncude In gross Income ony the amount actuay
receved by hm for the crop, and shoud take no deducton for the
penaty pad by the purchaser.
dvce s requested wth respect to the deductbty, for Federa
ncome ta purposes, of penates ncurred and pad by producers
under the grcutura d|ustment ct of 1938, as amended, upon
the marketng of certan crops n e cess of the farm marketng
quotas of such commodtes. Stuatons whch most commony gve
rse to ths queston are as foows:
1. drect sae s made by a producer to a buyer and the buyer,
us authorzed by the statute and appcabe reguatons of the Secre-
tary of grcuture ssued thereunder, deducts the amount of the
penates due on the commodty from the market prce of the com-
modty, payng to the producer the market prce ess the amount of
penaty deductons.
2. The producer pays to the Unted States the amount of the
penaty whch woud be ncurred wth respect to the marketng of
hs crop and thereafter markets that crop to a buyer, recevng from
such buyer the market prce of the commodty wthout any penaty
deductons.
3. The producer pays to the Unted States durng one ta perod
the amount of penates whch woud be ncurred wth respect to the
marketng of hs crop and markets that crop durng a subsequent ta
perod.
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19.23(a)-.
Under the provsons of the grcutura d|ustment ct of 1938,
as amended, marketng quotas are n effect wth respect to the market-
ng of wheat, cotton, tobacco, and peanuts. Farm marketng quotas
are estabshed for each farm sub|ect to marketng quotas, and any
marketng of a commodty from a farm n e cess of the farm market-
ng quota for the respectve commodty s sub|ect to a penaty at the
rate prescrbed by the ct. though n each nstance the purpose
of the penaty s to keep off the market durng a gven year e cessve
suppes of the respectve commodtes, dfferent methods are pro-
vded to accompsh ths purpose. The penaty rates for the 19 1
marketng year appcabe to the respectve commodtes are as
foows:
Wheat, per bushe 0. 9
Cotton, per pound 0. 07
Tobacco, per pound 0.10
Peanuts, per pound 0. 03
Pubc aw No. 7 , Seventy-seventh Congress, frst sesson, approved
May 26, 19 1, provdes that n the case of wheat the producer s sub-
|ect to the penaty on e cess wheat, but, f the wheat s sod to a buyer
n the Unted States, the buyer s abe for the payment of the penaty
to the Unted States. The producer may store hs wheat on the farm
or esewhere, and aso may obtan a oan on the e cess wheat from the
Commodty Credt Corporaton. In case wheat s stored, or paced
n oan wth the Commodty Credt Corporaton, the producer s re-
qured to secure the payment of the penaty on such e cess wheat and
s abe for the amount of the penaty on any depeton n the amount
of wheat so stored or paced n oan. producer havng e cess wheat
may, pror to the marketng of any wheat from the farm, pay or
secure to the Unted States the amount of penaty due on hs e cess
wheat and receve a marketng card evdencng hs rght to market,
wthout coecton of marketng quota penates, a wneat produced
on the farm. The producer wth e cess wheat may aso market such
wheat to a buyer wthout usng a marketng card, and n ths event
the buyer s requred to pay the penaty to the Unted States on a
wheat so purchased. Under paragraph 8 of Pubc aw No. 7 , how-
ever, the buyer s authorzed to deduct the amount of the penaty due
on the wheat from the prce pad to the producer.
Wth respect to cotton, t s stated that the producer s sub|ect to
the penaty, but, f the sae s to a buyer or other person n the Unted
States, the penaty s requred to be remtted by such buyer or other
person to the Unted States. The buyer may deduct the amount of
penaty from the prce pad to the producer. In the case of cotton,
the. penaty s coected ony upon the marketng of cotton n e cess
of a farm marketng quota, and thus the producer may market hs
fu quota wthout payng any penaty. It s ony when he markets
cotton n e cess of the quota that penates are ncurred. The pro-
ducer may, however, secure the payment of penates to the Unted
States, and n ths event t s possbe that the penates w be pad n.
one ta perod and the cotton marketed n another such perod.
The methods provded n the case of tobacco and peanuts are-
smar to the method used wth respect to wheat.
It s contended that the penates mposed under the grcutura
d|ustment ct of 1938, as amended, dffer mportanty from or--
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5
19.23(a) 1.
dnary penates n that the marketng of e cess wheat, cotton, to-
bacco, or peanuts s permssbe under the ct upon the payment of
the marketng penaty, whereas ordnary a penaty s mposed
as a punshment for an act of commsson or omsson; that the
payment of the penaty mposed by the grcutura d|ustment
ct, as amended, egazes the act wth respect to whch t s mposed,
whe ordnary the payment of a penaty eaves the act wth
respect to whch t was mposed none the ess wrong; and that the
marketng penates prescrbed by the act are remeda and not
puntve n nature.
Sectons 703(a) and 711 of the reguatons pertanng to market-
ng quotas for the 19 1 crops ssued on uy 15, 19 1, by the Unted
States Department of grcuture, grcutura d|ustment dmn-
straton, provde n part:
Set. 703. Payment of penates by producer .
(a) Producers abe for payment of penates. ach producer havng an
Interest n the wheat produced n 19 1 on any farm for whch a farm market-
ng e cess s determned sha be abe to pay the amount of the penaty on
the farm marketng e cess. The amount of the penaty whch any producer
sha pay sha nevertheess be reduced by the amount of the penaty whch s
pad by another producer or a buyer of wheat produced on the farm.
Sec. 711. Report of voatons and court proceedngs to coect
penaty.
It sha be the duty of the county commttee to report In wrtng to the
State commttee each case of faure or refusa to pay the penaty or to remt
the same to the Secretary of grcuture when coected. It sha be the duty
of the State commttee to report each such case n wrtng n quadrupcate
to the Unted States Department of grcuture wth a vew to the nsttuton
of proceedngs by the Unted States attorney for the approprate dstrct, under
the drecton of the ttorney Genera of the Unted States, to coect the pen-
ates, as provded n secton 376 of the ct. (Sec. 376, 52 Stat., 66, 7 U. S. C,
1376.)
mounts pad as penates for voaton of statutes have been hed
tc be nondeductbe for Federa ncome ta purposes ether on the
ground that such e pendtures are not a necessary ncdent to the
operaton of a busness or on the ground of pubc pocy. (See
urroughs udng Matera Co. v Comm- oner, 18 . T. ., 101.
affrmed 7 Fed. (2d), 178, Ct. D. 297, C. . -, 397 (1931), and
Great Northern Raway Co. v. Commssoner, 0 Fed. (2d), 372;
see aso G. C. M. 11358, C. . II-1, 29 (1933), n whch t s hed
that penaty payments n connecton wth ncome ta es, whether on
account of neggence, denquency, or fraud, are not deductbe from
gross ncome.)
though the amounts pad by the producer are. desgnated as pen-
ates n the statute and reguatons referred to above, t appears
that the purpose of the statute s to pace a charge aganst the
producer on the sae of the commodty whch was produced n e cess
of the quota. The statute does not prohbt producers from pro-
ducng the commodty, but merey paces a charge on the e cess of the
uota produced and marketed. The so-caed penates are not pad
or the voaton of, or noncompance wth, a statute or reguaton
or for any ega act, but are pad for the purpose of egazng
the marketng of the e cess producton, whch wth ths condton
the statute sanctons, and are, therefore, made n compance wth
the statute. It s accordngy the vew of ths offce that the so-
caed penates nre deductbe from gross ncome under secton 23(a)
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19.23(a)- .
6
of the Interna Revenue Code n computng net ncome as ordnary
and necessary e penses ncurred n carryng on a trade or busness.
In the frst stuaton outned above, where n a sae by a producer
to a buyer the buyer deducts the amount of the penaty due on the
commodty from ts market prce and pays to the producer such market
prce ess the penaty deducted, the producer w not be requred to
ncude n gross ncome the amount of such penaty deducton snce he
never receved such amount. Ony the amount actuay receved by
hm for hs commodty w be requred to be ncuded n gross ncome
and, snce he dd not pay the penaty on such commodty, there w be
no deducton aowabe under secton 23(a) of the Code for the penaty
attrbutabe to such commodty.
In the second stuaton presented the producer pays the Unted
States the penaty due and then ses the commodty to a buyer at
market prce wthout any penaty deducton. s above ndcated, n
s,uch case the fu amount receved by the producer from the buyer
shoud be ncuded n hs gross ncome and a deducton shoud be taken
under secton 23(a) of the Code for the amounts of such penates n
computng hs net ncome.
In the thrd stuaton presented, the producer pays the Unted States
n one ta perod the penates whch he woud ncur on marketng a
crop but actuay markets that crop n a subsequent ta perod. Where
a farmer reports on the bass of cash recepts and dsbursements, he s
requred to ncude n hs gross ncome amounts receved durng the
year from the sae of products rased durng the ta abe year or pror
years (secton 19.22(a)-7, Reguatons 103), and deductons may be
had ony for the amounts actuay e pended durng the year n carry-
ng on the busness of farmng. (Secton 19.23(a)-, Reguatons
103.) Thus, deductons for the penates pad n one ta abe perod
must be taken n that perod athough the products to whch the pen-
ates are attrbutabe are not sod unt a subsequent perod; and the
fu amount reazed on sae n the subsequent perod must be ncuded
n gross ncome for that perod.
Speca provson s made n the reguatons under whch a farmer
may report hs ncome when the condtons set fort theren are met.
Secton 19.22(a)-7, Reguatons 103, provdes n part:
If a farmer s engaged In producng crops whch take more than a year
from the tme of pantng to the tme of gatherng and dsposng, the ncome
therefrom may, wth the consent of the Commssoner (see secton 19. 1-2), be
computed upon the crop bass; but In any such cases the entre cost of producng
the crop must be taken as a deducton for the year In whch the gross ncome
from the crop s reazed.
Secton 19.23(a)- provdes, n part:
Where a fanner s engaged n producng crops whch take more than
a year from the tme of pantng to the process of gatherng and dsposa, e penses
deducted may, wth to consent of Commssoner (see secton 19. 1-2), be deter-
mned upon the crop bass, and such deductons must be taken n the year n
whch the gross ncome from the crop has been reazed.
In the case of a farmer who reports hs ncome on the accrua bass,
the deducton on account of such penates must be taken n the year
n whch the penates are ncurred athough the products to whch the
penates are attrbutabe are not sod unt a subsequent year.
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7
19.23(b)- .
S CTION 23(b). D DUCTIONS FROM GROSS
INCOM : INT R ST.
Secton 19.23(b)-: Interest. 19 2-10-11010
G. C. M. 23111
INT RN L R NU COD .
Interest charged by n broker on Indebtedness due Mm from a
customer, under the usua type of margn account, Is actua or con-
structvey pad for Federa Income tu purposes ony as the broker
receves payments from the customer or makes coectons for the
account of the customer. Such payments may conss of amounts
receved from (a) the coecton by the broker of dvdends or
nterest for the account of he customer; (6) the sae by (he customer
of securtes hed by the broker or to be receved by hm; or (c) the
depost of cash bv the customer.
Recommended that I. T. 3 8 (C. . 10 1-1, 207) be modfed.
Reference s made to I. T. 3 8 (C. . 19 1-1, 207), reatng to
deductbty of nterest charged by a broker n connecton wth a
oan on a margn account where the customer s (ta payer s) books are
kept on the cash recepts and dsbursements bass. Further consdera-
ton has been gven to the matter n vew of a request for carfcaton
of the rung.
The ast paragraph of I. T. 3 8 , supra, reads as foows:
Ordnary, nterest charged by a broker on a oan to a customer reduces
any credt the customer may have whch s otherwse avn.nhe for wthdrawa
by hm on the date on whch the Interest charge s made. When a customer s
wthdrawabe credt s thus reduced at any tme wthn the ta abe year, payment
of nterest has been effected. If the wthdrawnb e credt of the customer-ta payer
reportng Income on the cash recepts and dsbursements bass Is Insrffccnt to
cover the entre Interest charge, he s entted to n deducton ony to the e tent
that such credt offsets the nterest charge. No deducton may be aowed for
nterest charges whch have not been thus offset by wthdrawabe credt, regard-
ess of the fact that on the date on whch the Interest charge s made, or at the
end of the customer s ta abe year, the then market vaue of coatera hed by
the broker may be suffcent to cover the amount of the onn owng to the broker
pus the accrued nterest thereon. The mere reducton In the ta payer s equty
In the securtes hed by the broker does not consttute constructve payment
of he nterest.
In the request for carfcaton of the rung, a bref descrpton of
the saent characterstcs of the usua margn account s stated as
foows:
When a customer (ta payer) purchases securtes through a broker and
deposts wth the broker ony a porton of the purchase prce, a margn account Is
created. Ths parta payment s commony known as margn. The mnmum
amount of margn that a broker can or w accept s governed by rues pro-
mugated by the Federa Reserve oard, the rues of the stock e change or e -
changes of whch the broker s a member, and n some cases by the broker s own
speca requrements. The account s operated under an agreement known as
customer s agreement.
The margn account as recorded on the broker s books refects the debt ha-
ance, representng the amount oaned to the customer, and the securtes hed as
coatera. From both the customer s and the broker s standpont these are re-
atvey unmportant and merey contrbute to the a-Important eement of equty,
that s, the amount by whch the vaue of the coatera e ceeds the debt baance
In the account.
The debt baance n the account s ncreased by :
a) the chargng of nterest by the broker;
(6) the chargng of a servce charge by the broker;
c) the addtona purchase of securtes by the customer;
(d) the wthdrawa of cash by the customer.
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19.23(b)- .
8
The debt baance In the account Is decreased by :
(o) the coecton by the broker of dvdends or nterest for the account of the
customer;
(6) the sae by the customer of securtes hed by the broker or to be receved
by hm;
(c) the depost of cash by the customer, ether n answer to a ca from the
broker for addtona margn or vountary by the customer.
Under the terms of the customer s agreement the broker has the rght to
refuse to permt an ncrease In the debt baance and to demand that t be re-
duced. Whether he e ercses ether of these rghts usuay depends upon the
equty contaned n the account and not upon the fact that dvdends or nterest
have been coected for the customer, or that other credts have been passed to
the account.
When the debt baance s decreased n a margn account, the equty In the
account ncreases. n ncrease n the vaue of the coatera woud have e ncty
the same effect. Conversey, an ncrease n the debt baance or a decrease n (he
vaue of the coatera woud decrease the equty. quty n a margn account
s an ntegra part thereof .
The customer s agreement n ths case contans provsons read-
ng as foows:
. moneys, securtes, commodtes, or other property whch you may at any
tme be carryng for the undersgned or whch may at any tme be n your
possesson for any purpose, ncudng safekeepng, sha be sub|ect to a genera
en for the dscharge of a obgatons of the undersgned to you, rrespectve
of whether or not you have made advances n connecton wth such securtes,
commodtes, or other property, and rrespectve of the number of accounts the
undersgned may have wth you.
5. securtes and commodtes, or any other property, now or hereafter
hed by you, or carred by you for the undersgned (ether Indvduay or
|onty wth others), or deposted to secure the same, may from tme to tme and
wthout notce to me, be carred n your genera oans and may be pedged, re-
pedged, hypothecated or rehypothecated, separatey or n common wth other
securtes and commodtes or any other property, for the sum due to you thereon
or for a greater sum and wthout retanng n your possesson and contro for
devery a ke amount of smar securtes or commodtes.
6. Debt baances of the accounts of the undersgned sha be charged wth
nterest, n accordance wth your usua custom, and wth any ncreases n rates
caused by money market condtons, and wth such other charges as you may
make to cover your factes and e tra servces.
7. You are hereby authorzed, n your dscreton, shoud the undersgned de
or shoud you for any reason whatsoever deem t necessary for your protecton,
to se any or a of the securtes and commodtes or other property whch may
be n your possesson, or whch you may be carryng for the undersgned .

11. t any tme and from tme to tme, n your dscreton, you may wthout
notce to the undersgned, appy and/or transfer any or a moneys, securtes,
commodtes, and/or other property of the undersgned Interchangeaby between
any accounts of the undersgned (other than from reguated commodty accounts).
In the case of such margn account, any nterest charged by the
broker ncreases the ndebtedness of the customer to the broker. If
he broker deems the coatera suffcent securty for such ncreased
debt, payment of the nterest charged may be postponed. Payment of
nterest charges, as we as other charges servng to ncrease the debt,
s effected by recept of amounts by the broker from the customer or
from others for the account of the customer. Such recepts by the
broker are refected by credts to the customer s account whch serve
to decrease hs debt baance. That s, such credts refect payments
by the customer, thereby reducng hs then outstandng ndebtedness
to the broker. In the absence of agreement to the contrary, such credts
to the customer s account shoud be frst apped as payment of n-
terest prevousy charged by the broker. The e cess of such credts
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15 19.23(b)- .
over nterest due shoud then be apped n payment of the prncpa of
the debt. Charges by the broker subsequent to such payments n turn
ncrease the debt. smutaneous e change of money or checks by the
customer and broker shoud be regarded as a nuty for Federa
ncome ta purposes.
ssentay, a margn account estabshes a debtor-credtor reaton-
shp between the customer and the broker. The fact that the coatera
has a vaue n e cess of that requred, thereby creatng what s some-
tmes referred to as a wthdrawabe baance1 n the customer s favor,
refects a favorabe equty status rather than an actua or constructve
payment of any knd. That s, such a baance merey enabes the
customer to ncrease hs debt to the broker wthout furnshng add-
tona coatera. Such ncrease of debt resuts from (a) the charg-
ng of nterest by the broker; (b) the chargng of a servce charge by
(he broker; (c) the purchase of addtona securtes by the customer;
or (d) the wthdrawa of cash by the customer.
In cases n whch a customer mantans more than one margn ac-
count wth the same broker, nterest charged to one account s not pad
by a credt of that amount from another account f the tota ndebted-
ness of the customer s n effect ncreased by the nterest charged. Such
bookkeepng entres merey serve to transfer the nterest charge from
one account to another.
In vew of the foregong, t s the opnon of ths offce that nterest
charged by a broker on ndebtedness due hm from the customer, under
the usua type of margn account, s actuay or constructvey pad
for Federa ncome ta purposes ony as the broker receves payments
from the customer or makes coectons for the account of the customer.
s ndcated by the above-quoted statement, such payments may con-
sst of amounts receved from (o) the coecton by the broker of
dvdends or nterest for the account of the customer; the sae by
the customer of securtes hed by the broker or to be receved by hm;
(c) the depost of cash by the customer, ether n answer to a ca from
the broker for addtona margn or vountary.
It s recommended that I. T. 3 8 , supra, be modfed to accord wth
the concusons reached heren.
. P. W .NC L,
Chef Counse. ureau of Interna Revenue.
Secton 19.23(b)-: Interest. 19 2-10-11011
I. T. 3.536
INT RN L R NU COP .
In vew of (. C. M. 23111, page 7, ths uetn), I. T. 3 8 (C. .
19 1-1,207) s modfed to accord wth the concusons reached theren.
Secton 19.23(b)-: Interest. 19 2-1 -110 6
( so Secton 22(b), Secton 19.22(b) (2)-2.) I. T. 35 5
INT RN L R NU COD .
The amount desgnated as nterest by secton 12(b) of the Cv
Servce Retrement ct, whch s requred to be pad by a renstated
cv servce empoyee, s not deductbe as nterest pad on n-
debtedness under secton 23(b) of the Interna Revenue Code.
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5 19.23(c)-I.
50
dvce s requested whether the nterest on amounts redeposted
wth the Government by a renstated cv servce empoyee s an
aowabe deducton, for Federa ncome ta purposes, under secton
23(b) of the Interna Revenue Code.
Secton 12(b) of the Cv Servce Retrement ct provdes that
a money returned to an empoyee upon hs resgnaton from the
sen e must, upon renstatement, retransfer, or reappontment to a
oston wthn the purvew of the ct, be redeposted wth nterest
efore any such empoyee may derve any benefts under the ct, but
nterest sha not be requred coverng any perod of separaton from
the servce. The amount refunded s sub|ect to per cent nterest,
compounded on une 30 of each year, from date of reempoyment
n a poston sub|ect to the Retrement ct, and must be pad before
the empoyee s egbe for certan retrement benefts. The rede-
post may be made n a ump sum or by nstament payments.
Under the provsons of secton 23(b) of the Interna Revenue
Code there s aowed a deducton for a nterest pad or accrued
wthn the ta abe year on ndebtedness, e cept on ndebtedness n-
curred to purchase or carry certan obgatons the nterest upon
whch s e empt from ta aton.
Interest has been defned to be compensaton for the use of bor-
rowed money or for the forbearance of money egay due. Under
the Interna Revenue Code, nterest, as a deductbe tem n com-
putng ta abe net ncome, means an amount pad on an uncond-
tona and egay enforceabe obgaton for the payment of money.
(See utenreth v. Commssoner, 115 Fed. (2d), 856; Dane ros,
vo. v. Commssoner, 28 Fed. (2d), 761.)
ccordngy, t s hed that the amount desgnated as nterest by
secton 12(b) of the Cv Servce Retrement ct, whch s requred
to be pad by a renstated cv servce empoyee, s not deductbe as
nterest pad on ndebtedness under secton 23(b) of the Interna
Revenue Code.
S CTION 23(c). D DUCTIONS FROM GROSS
INCOM : T S G N R LLY.
Secton 19.23 (c) -1: Ta es. 19 2-1-109 6
G. C. M. 22998
INT RN L R NU COD ND R NU CTS OF 1928, 1932. 193 , 1936,
ND 1938.
The ta of cents per gaon on gasone and motor fue mposed
by the State of Lousana under the provsons of ct No. 6 of the
e tra sesson of 1928, the addtona ta of 1 cent per gaon mposed
under the provsons of ct No. 1 of the e tra sesson of 1930, and
the ta of 2 cents per gaon mposed under the provsons of ct
No. 87 of the sesson of 193(1 n eu of the ta es prevousy mposed
by the parshes and the cty of New Oreans are deductbe by the
deaer who pays them. If, however, the ta es are added to or made
a part of the busness e pense of the deaer, or are otherwse used
to reduce hs net ncome, they are not deductbe separatcv as ta es.
G. C. M. 8936 (C. . -, 110 (1931)) and G. C. M. 1 970 (C. .
I -2, 69 (1935)) revoked.
In vew of decsons of the Supreme Court of Lousana, reatng
to the gasone and motor fue ta es mposed by that State, ths offce
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51
19.23(c)- .
has reconsdered the concusons reached n G. C. M. 8936 (C. . -,
110 (1931)) and G. C. M. 1 970 (C. . I -2, 69 (1935)).
In those rungs consderaton was gven to the deductbty, for
Federa ncome ta purposes, of a ta of cents per gaon mposed
upon a gasone and motor fue sod, used, or consumed n the
State of Lousana for domestc consumpton ( ct No. 6 of the
e tra sesson of 1928, as amended, Lousana Genera Statutes (part,
1939, chapter 8), and to the deductbty of an addtona ta of
1 cent per gaon mposed under the authorty of rtce I- of the
Consttuton of Lousana, as added by ct No. 1 of the e tra sesson
of 1930. It was hed that these gasone and motor fue ta es were
deductbe by the consumer.
Snce the pubcaton of those rungs, the Supreme Court of
Lousana has hed that these gasone and motor fue ta es are
mposed upon the deaer. In State v. Standard O Co. of Lousana
(190 La., 338, 182 So., 531) the court made the foowng statements:
It s argued that, whe the deaer n gasone s made prmary responsbe
for the ta , yet the ta s n reaty pad by the consumer and not by the
deaer, and that the deaers are ta coectors and not ta payers. In support
of ths argument the State offered n evdence nvoces sent out by the defendant
to fng staton operators, showng the ta as a separate tem. There were
aso ntroduced photographs of pacards dspayed at these fng statons, show-
ng the segregaton of the ta from the prce of gasone. The Intended pur-
pose of these offerngs was to show that the ta s coected from the consumer
when the commodty s sod at reta. It Is sad n bref that the deaers
coect the ta from the consumers and remt t to the State.
The contenton now made by counse for the State that gasone ta Is a
consumer ta pad by the consumng pubc and that the deaers are ta
coectors and not ta payers, s n the teeth of a the statutes and contrary to
numerous decsons of ths court and recent decsons of the Federa
courts.

In practce the reta deaers merey added the amount of the ta to the prce
of the gasone, or passed t on to the consumer. That s the practce of
a deaers n cases of ths knd. In State v. Wson f Co. (179 La., 6 8, 15
So., 636, 638) the court had occason to dscuss the queston whether a franchse
ta Is n fact a consumer ta when the amount of the ta Is passed on to
the consumer. In speakng of the ta , ths court sad (page 638) :
The ta s ad on the manufacturer, whoesaer, or |obber, and remans on
hm. It does not pass to the purchaser of the merchandse, athough ncor-
porated In the b to hm, whether t appear on the b separatey or not. The
purchaser does not pay the ta , athough he may pay the vendor more for the
goods, because of the vendor s obgaton to pay t, but that s a.

The fact that ths defendant requred operators of ts fng statons to
ost notces showng a segregaton of the prce of gasone from the ta
can not be construed as shftng the ta from the deaer to the consumer, be
cause, as a matter of aw, the deaer s requred to pay the ta . The postng
of such notces was merey a matter of busness practce whch coud not
affect the aw.
The concuson reached n the Standard O Co. case, supra, s
consstent wth the reasonng of the Lousana Supreme Court n
other recent cases. In State v. Sncar Refnng Co. (195 La., 288,
19G So., 3 9) the court hed that deaers n gasone or other motor
vehce fue must pay the ta and that t s measured by the tota
gaonage manufactured or mported nto the State for sae, use, or
consumpton theren and not by the gaonage actuay sod, used,
or consumed.
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I 19.23(c)- .
52
In vew of the foregong, t s hed that for Federa ncome ta
purposes the Lousana gasone and motor fue ta es are not deduct-
be by the consumer but are deductbe by the deaer who pays them.
If, however, the ta es are added to or made a part of the busness e -
pense of the deaer, or are otherwse used to reduce hs net ncome,
they are not deductbe separatey bv hm as ta es. ccordngy,
G. C. M. 8936 and G. C. M. 1 970, supra, are revoked.
The concuson reached heren s appcabe aso to the addtona
gasone and motor fue ta of 2 cents per gaon whch s mposed
by ct No. 87 of 1936 (Lousana Genera Statutes Dart, 1939, chap-
ter 9) n eu of the ta es prevousy eved by the parshes and by
the cty of New Oreans for the reason that the reevant provsons
are substantay the same as those of the ta es herenbefore
consdered.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
Secton 19.23(c)-: Ta es.
INT RN L R NU COD .
rtsh bocked accounts as reated to deductons for rtsh ta es
pad or accrued. (See Mn. 5297, page 8 .)
Secton 19.23 (c)-1: Tu es. 19 2-3-10960
I. T. 3526
INT RN L R NU COD ND R NU CTS OF 1928, 1932. 193 , 1936, ND
1938.
G. C. M. 22998 (page 50, ths uetn), hodng that certan Lous-
ana gasone and motor fue ta es are deductbe for Federa ncome
ta purposes by the deaer and not by the consumer, w be apped
ony to the ta abe year 19 1 and subsequent ta abe years.
In G. C. M. 8936 (C. . -, 110 (1931)) and G. C. M. 1 970
(C. . I -2, 69 (1935)) consderaton was gven to the deductbty
for Federa ncome ta purposes of a ta of cents per gaon
mposed upon a gasone and motor fue sod, used or consumed
n the State of Lousana for domestc consumpton ( ct No. 6 of
the e tra sesson of 1928. as amended, Lousana Genera Statutes
Dart, 1939, chapter 8), and to the deductbty of an addtona ta
of 1 cent per gaon mposed under the authorty of rtce I-
of the Consttuton of Lousana, as added by ct No. 1 of the
e tra sesson of 1930, and t was hed that the ta es mposed were
deductbe by the consumer. Snce the pubcaton of G. C. M. 8930.
supra, and G. C. M. 1 970, supra, the Supreme Court of the State of
Lousana has hed that such gasone and motor fue ta es are
mposed upon the deaer. (See State v. Standard O Co. of Lous-
ana, 190 La., 338, 182 So., 531, and State v. Sncar Refnng Co.,
195 La., 288,196 So., 3 9.)
In vew of the aforesad decsons of the Supreme Court of the
State of Lousana, G. C. M. 8936, supra, and G. C. M. 1 970, supra,
have been revoked bv G. C. M. 22998 (page 50, ths uetn), whch
hed that for Federa ncome ta purposes the ta es n queston are not
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53
19.23(c)- .
deductbe by the consumer but are deductbe by the deaer who
pays them. G. C. M. 22998, supra, hed aso that the concuson
reached theren s appcabe to the addtona gasone and motor
fue ta of 2 cents per gaon whch s eved by ct No. 87 of 1936
(Lousana Genera Statutes Dart, 1939, chapter 9), n eu of the
ta es prevousy eved by the parshes and by the cty of New Oreans.
Pursuant to authorty contaned n secton 3791(b) of the Interna
Revenue Code, G. C. M. 22998, supra, w be apped ony to the
ta abe year 19 1 and subsequent ta abe years.
Norman D. Cann,
ctng Comm onrr of Interna Revenue.
pproved December 29, 19 1.
erbert . Gaston,
ctng Secretary of the Treasury.
Secton 19.23(c)-1: Ta es. 19 2- -1096
I. T. 3527
INT RN L R Nt COD NT) R NT CT OF 1028.
New York Cty rea estate ta es accrue at the me when, under
the charter of the cty of New York, the rea property assessment
ros are devered to the coectng offcer wth warrants attached
authorzng coecton of the ta es.
Nonacquescence (C. . 19 0-1, 5) In .ST. . f M. . rrnhrmrr
Co. v. Commtsoner ( 1 . T. ., 2 9), wthdrawn; I. T. 283
(C. . III-2, 189 (19T ) ), revoked, and I. T. 3328 (C. . 193 ) 2,
8 ) modfed to the e tent that It a In confct wth the vews
e pressed heren.
Reference s made to I. T. 283 (C. . III-2, 189 (193 )). wheren
t was hed that n the case of a vendor and a vendee of rea property
n New York Cty, under the provsons of the charter of that cty,
the ownershp of the rea property on May 1 and November 1 of
each year was the event whch determned the abty for the ta es
thereon, and that the ta es accrued, for Federa ncome ta purposes,
on those dates.
The poston so taken was based on the fact that the charter of the
cty of New York then n effect provded for the f ng of the ta abe
status of a rea property assessabe for ta aton n that cty for the
succeedng fsca year on the 1st day of October n each year; for the
devery to the board of adermen on March 1 of certfed assessment
ros; for the f ng by the board of the ta rate and the devery
to the cty coector, on or before March 20, of the assessment ros,
wth warrants attached, drectng the cty coector to coect from
the persons named n the assessment ros the sums mentoned oppo-
ste ther names; and that rea property ta es shoud become due and
payabe, n equa parts, on May 1 and November 1, and shoud be
and become ens on rea property and shoud be deemed to be charges
thereon on those dates and not earer .
Reference s aso made to I. T. 3328 (C. . 1939-2. 8 ), wheren t
was hed that under the charter of the cty of New York, effectve
anuary 1, 1938, rea estate ta es accrued for Federa ncome ta
purposes, for the fsca perod anuary 1, 1939, to une 30. 1939. on
pr 1. 1939, and that for the fsca year begnnng uy 1, 1939,
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19.23(c)- .
5
and subsequent fsca years, one-haf of such ta es accrued on October
1 and one-haf on pr 1. The dfference between the accrua date
as determned n I. T. 283 , supra, and the accrua date as determned
n I. T. 3328, supra, was due to the fact that n the ater charter of
the cty of New York t was provded that the ta es on rea estate
became due and payabe on October 1 and pr 1 and became ens on
the rea property and shoud be deemed to be charges thereon on
those dates (nstead of on May 1 and November 1 as provded n the
earer charter). owever, the poston taken n I. T. 3328, supra,
was n prncpe the same as the poston taken n I. T. 283 , supra,
and the ater rung, n effect, consttuted an affrmance of the earer
rung.
It may be stated that the poston taken n I. T. 283 , supra, and
I. T. 3328, supra, s n accord wth the poston taken by the oard of
Ta ppeas n ts memorandum opnons n 7 th St ret t partment
Corporaton v. Commssoner (Docket No. 521 2, une 23, 1933, and
May 10, 193 ), and n 79th Street partment Corporaton v. Com-
mssoner (Docket No. 52170, une 23, 1933, and May 10,193 ). ow-
ever, n the case of the S. . c M. . ernhemer Co. v. Commssoner
( 1 . T. ., 2 9, nonacquescence, C. . 19 0-1, 5), whch nvoved
the queston of the accrua date of New York Cty rea property
ta es, the oard dd not foow the poston taken by t n ts
memorandum opnons n 7 th Street partment Corporaton v.
Commssoner, supra, and the 79th Street partment Corporaton v.
Commssoner, supra, but hed, n effect, that such ta es accrued
for Federa ncome ta purposes before the end of March when the
ta bs are sent out. The facts n the ernhemer case were brefy
as foows: The ta payer, whch was n the rea estate busness n
New York Cty, and whch for the year 193 and pror years kept
ts books and fed ts returns on a caendar year bass, on May 8,
1935, receved permsson from the Commssoner to change ts ac-
countng perod to a fsca year endng September 30. In December.
1935, the ta payer, whch kept ts books and prepared ts ncome ta
returns on the accrua bass, fed ts ncome ta return for the perod
anuary 1, 1935, to September 30,1935. It ncuded n ts deductons,
n addton to New York Cty rea estate ta es for the perod an-
uary 1, 1935, to une 30, 1935, whch were not questoned by the
ureau, New York Cty rea estate ta es on ths property for the
perod uy 1, 1935, to September 30, 1935. on the theory that these
ta es were propery accruabe n the ta abe perod ended September
30, 1935. The Commssoner dsaowed the deducton n vew of
the fact that under I. T. 283 , supra, and I. T. 3328, supra, these ta es
were not accruabe unt October 1, 1935. The ta es n dspute con-
ssted n part of ta es n the amount of 29,06 .60 on property owned
by the ta payer, whch ta es, athough they were accrued by the ta -
payer for the perod ended September 30, 1935, had not been pad by
that date. The other porton of the dsputed deducton conssted of
ta payments n the amount of 10,011 representng ta es on property
sub|ect to a mortgage. The mortgage was n defaut and, pursuant
to an agreement wth the New York State Mortgage Commsson,
the ta payer pad to the commsson monthy one-twefth of the
nterest, ta es, water rates, and assessments on the premses. Dur-
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55
19.23(c)- .
ng the months of uy, ugust, and September the ta payer pad
The oard n aowng the deducton of the tota amount of ta es
so accrued by the ta payer for the perod ended September 30, 1935,
representng the ta es on ts property for the perod uy 1, 1935,
to September 30, 1935, stated n part as foows:
The oard has hed n certan cases that ta es accrue on the date when they
become a en on the property. .See Mnne M. Cowtrd (39 . T. ., 1158) an
cases there cted. Ths s not, however, a test of unversa appcabty. ( enry
. urche . r., ecutor, 1 . T. ., 55.) In the nderson case
Unted States v. nderson. 260 1 . S.. 22 the Supreme Court observed:
Ony a word need be sad wth reference to the contenton that the ta
upon muntons manufactured and sod n 1016 dd not accrue unt 1017. In
a technca ega sense t may be argued that a ta does not accrue unt
has been assessed and becomes due; but It Is aso true that n advance of the
assessment of a a a the events may occur whch t the amount of the
ta and determne the abty of the ta payer to pay t.
The statutes here Invoved the provsons of the charter of New York Cty
provde for the devery to the board of adermen on March 1 of the certfed
assessment ros, the f ng by the board of the ta rate, the e tenson of the
amounts to be pad, and the devery to the cty coector on or before March 20
of the assessment ros, wth coecton warrants anne ed. They further
provde that a ta es upon rea estate for 1935 and 1930 sha be due and
payabe n two nstaments, respectvey, pr 1 and October 1, and that such
ta es sha be and become ens on the respectve days when they become due
and payabe and not earer, provded, however, that f there be no denquent
ta es a ta payer may antcpate ater payments and pay any subsequenty due
payment at the tme of makng the frst payment, or at any tme pror to October
1, and receve a dscount thereon. It Is stpuated as a fact that the ta bs
are sent to the ta payers durng the month of March.
In the ght of these statutory provsons, certan concusons emerge. It Is
obvous that before the end of March when the ta hs are sent out a the
events whch f the amount of the ta and determne the abty of the
ta payer to pay t have occurred, thereby satsfyng the test ad down In
Unted States v. nderson. It s equay cear that athough the second haf
f the ta es s not techncay due and payabe unt October 1, ths pro-
vson oses a force f the ta payer eects to antcpate the due date and pay
the second haf before October 1. From ths It aso foows that the fact that
a en for the second haf docs not attach unt October 1, can not n ths case
be controng. If n ta payer pad the second haf of hs ta es before October 1.
no en woud ever attneh.
Turnng to the facts, we fnd that the ta es due from pettoner on October 1,
for the perod uy 1 to September 30, 103.r , as to property Invoved In the
frst Issue had been fnay f ed and determned In March. Ta payer had
receved offca notce of the same n the form of a b from the coector,
dated March 26, 1935. The ta b, on ts face, curred notces of the rght to
antcpate payment. Though they were not techncay due unt October 1.
pettoner, n the ght of te facts, accrued them on ts books pror to that
date. Ths acton we beeve to have been pro| er and to have been In accord
wth the prncpes of accrua accountancy. (See Unted States v. nderson,
supra.) On ths pont we reverse the Commssoner.
The oard s decson n the ernhemer case, whch s contrary to
the poston taken n I. T. 283 , supra, and I. T. 3328, supra, was
sustaned by the Crcut Court of ppeas for the Second Crcut n
a per curam opnon (121 Fed. (2d), 5 ) dated uy 7, 19 1, on the
authorty of the decson of the Supreme Court of the Unted States
n Unted States v. nderson (269 U. S., 22, T. D. 3839, C. . -,
179 (1926)), and of the decson of the Crcut Court of ppeas
for the Ffth Crcut n Carondeet udng Co., Inc., v. Fontenot
(111 Fed. (2d), 267).
amount of 10,011.
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I 19.23(c)- .)
66
In vew of the poston taken by the oard n the ernhemer case
to the effect that New York Cty rea property ta es accrue before
the end of March when the ta bs are sent out, whch poston
has been approved by the Crcut Court of ppeas for the Second
Crcut, t s apparent that the ureau s poston that New York
Cty rea property ta es accrue as of October 1 and pr 1 of each
year can not be sustaned. It s beeved that the ureau shoud now
take a poston, reatve to the accrua date of New York Cty rea
property ta es, consstent wth the poston taken by the oard and
the Crcut Court of ppeas for the Second Crcut n the ernhemer
case, notwthstandng the fact that the poston there taken by the
oard s contrary to the poston generay taken by the ureau that
State (or cty) property ta es accrue on the date as of whch the assess-
ment of the ta s made (cf. G. C. M. 21373, C. . 1939-2, 82).
The oard n the ernhemer case dd not specfy the e act date on
whch New York Cty rea estate ta es accrued, but ndcated merey
that t consdered that such ta es accrued n March. Ths was suff-
cent for the purposes of that case, snce the queston there nvoved
was whether these ta es accrued n the ta abe perod ended Sep-
tember 30, 1935. The oard s reasonng, embodyng ts reance
upon ts hodng n enry . urche, r. ecutor, v. Commssoner
( 1 . T. ., 55), whch nvoved the consderaton of speca statutes
appcabe to the ta aton of rea property n Suffok County, N. Y.,
somewhat smar to the provsons of the charter of New York
Cty consdered n the ernhemer case, mpes that t was of the
opnon that the New York Cty rea estate ta es accrued on or before
the 20th day of March, when (under secton 923 of the charter of New
York Cty as t e sted at that tme) the rea property assessment ros
were devered by the presdent of the board of adermen of New-
York Cty to the cty coector wth the proper warrants attached
authorzng the coector to coect the sums mentoned theren. It
s, therefore, hed that New York Cty rea estate ta es accrue at the
tme when, under the charter of the Cty of New York, the rea prop-
erty assessment ros are devered to the proper offcer wth warrants
attached authorzng coecton of the ta es. ( ttenton s nvted
to the fact that, under secton 171 of the charter of the cty of New
York, effectve anuary 1, 1938, the assessment ros of each borough
are to be devered by the presdent of the counc to the treasurer
wth proper warrants attached thereto on or before une 30.)
It s noted that n the ernhemer case the ta payer n ts return for
the perod anuary 1, 1935, to September 30, 1935, accrued, and
took a deducton for, three-fourths of the New York Cty rea property
ta es due for the year 1935, and that the oard sustaned the deduc-
ton. Ths offce does not consder that t foows from the fact that
the oard approved the ta payer s deducton of three-fourths of
the amount of ts New York Cty rea estate ta es for 1935, that the
oard was of the opnon that these ta es, notwthstandng the fact
that they accrued n March, mght nevertheess be aocated on a
monthy or other perodc bass.
It s noted aso that the Crcut Court of ppeas for the Second
Crcut n ts per curam decson affrmng the oard s decson n
ths case cted wth approva the decson of the Crcut Court of
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67
19.23(o)-.
ppeas for the Ffth Crcut n Carondeet udng Co. v. Fontenot,
supra, n whch that court hed that a purchaser of a budng n
New Oreans was entted to a deducton for cty and State ta es
on the budng n an amount proportonate to that part of the year
n whch t owned the budng. It s not beeved, however, that the
court s ctaton of the Carondeet case shoud be taken to ndcate that
the court was of the opnon that ta es, accruabe as of a certan
date, may nevertheess be aocated on a monthy or other perodca
bass.
s ndcated above, the decson n the ernhemer case s contrary
to the genera rue heretofore foowed by the ureau as to the accrua
date of rea property ta es. ccordngy, that decson w not be
gven genera appcaton, but w be apped ony n cases nvovng
New York Cty rea property ta es.
In vew of the foregong, nonacquescence n the decson of the
oard of Ta ppeas n S. . M. . ernhemer Co. v. Comms-
soner, supra (C. . 19 0-1, 5) s wthdrawn, I. T. 283 , supra, s
revoked, and I. T. 3328, supra, s modfed to the e tent that t s n
confct wth the vews e pressed heren.
Secton 19.23(c)-1: Ta es. 19 2-12-11032
I. T. 35 0
INT RN L R NU COD .
The decared vaue e cess-profts ta (orgnay named e cess-
profts ta ) mposed by secton 600, Chapter 2 , of the Interna
Revenue Code, as amended, and the smar e cess-profts ta
mposed by secton 602 of the Revenue ct of 1938, and by secton 106
of the Revenue ct of 1935 (before and after amendment by secton
02 of the Revenue ct of 1936), pad or accrued wthn the ta abe
year, are deductbe for the purposes of computng corporaton
norma-ta net Income and e cess profts net ncome for ta -
abe years begnnng after December 31, 19 0, as we as for ta abe
years begnnng after December 31, 1939, but before anuary 1, 19 1;
and are aso deductbe for the purpose of computng corporaton
surta net ncome for ta abe years begnnng after December 31,
19 0.
The smar e cess-profts ta mposed by secton 702 of the
Revenue ct of 193 , and by secton 216 of the Natona Industra
Recovery ct, Is not deductbe for the above-mentoned purposes.
dvce s requested whether the decared vaue e cess-profts ta
mposed by secton 600, Chapter 2 , of the Interna Revenue Code,
as amended, and the smar e cess-profts ta es mposed by provsons
of pror cts, are deductbe for the purposes of computng corpora-
ton norma-ta net ncome (under secton 13(a)2, Chapter I ,
of the Code, as amended) and e cess profts net ncome (under
secton 711 (a), Chapter 2 , of the Code, as amended) for ta abe years
begnnng after December 31, 1939, but before anuary 1, 19 1, and
for ta abe years begnnng after December 31,19 0; and for the pur-
pose of computng corporaton surta net ncome (under secton
15(a), Chapter I , of the Code, as amended) for ta abe years begn-
nng after December 31,19 0.
Secton 13(a)2 of the Code, as amended, provdes that the term
u norma-ta net ncome means the ad|usted net ncome mnus
7 918 2 8
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5 19.23(c)- .
58
a certan credt for dvdends receved; and secton 13(a) 1 of the
Code, as amended, provdes that the term ad|usted net ncome
means the net ncome mnus a certan credt reatng to nterest
on obgatons of the Unted States and Government corporatons.
Secton 711(a) of the Code, as amended, provdes that the e cess
profts net ncome (for the purpose of the e cess profts ta m-
posed by secton 710, Chapter 2 , of the Code, as amended) for any
ta abe year begnnng after December 31.1939, sha be the norma-
ta net ncome as defned n secton 13(a)2 for such year, e cept that
certan ad|ustments, not matera to the questons heren presented,
sha be made.
Secton 216 of the Natona Industra Recovery ct, approved une
16,1933 ( 8 Stat.. 195, 208), for the frst tme mposed upon ncome of
corporatons an e cess-profts ta n the determnaton of whch
the decared vaue of ther capta was a basc factor: and a smar
u e cess-profts ta was mposed, successvey, by secton 702 of the
Revenue ct of 193 , by secton 106 of the Revenue ct of 1935 (before
and after amendment by secton 02 of the Revenue ct of 1936), b-
secton 602 of the Revenue ct of 1938, and by secton 600, Chapter 2 ,
of the Interna Revenue Code as orgnay enacted. The name of the
ta mposed by secton 600 of the Code was changed to decared
vaue e cess-profts ta , effectve February 10, 1939 (date of orgna
enactment of the Code), by secton 506(a) of the Second Revenue ct
of 19 0, n order more ready to dstngush such ta from the essen-
tay dfferent and addtona e cess profts ta mposed for ta abe
years begnnng after December 31,1939, by secton 710 of Chapter 2
of the Code, whch subchapter was nserted n the Code by secton 201
of the Second Revenue ct of 19 0.
In so far as ta abe years begnnng after December 31, 1939, but
before anuary 1, 19 1, are concerned heren, secton 23(c) of the
Code, as amended, effectve February 10,1939 (date of orgna enact-
ment of the Code), by secton 506(b) of the Second Revenue ct of
19 0, provded:
In computng net Income there sha be aowed as deductons:
Ta es Grnebay. Ta es pad or accrued wthn the ta abe year, e cept
Federa ncome, war-profts, and e cess-profts ta es (other than the
e cess-profts ta mposed by secton 106 of the Revenue ct of 1935 ( 9
Stat. 1019), or by secton 602 of the Revenue ct of 1938 (52 Stat. 507),
and other than the decared vaue e cess-profts ta Imposed by secton 600) ;
From the foregong, t s cear that the decared vaue e cess-
profts ta (orgnay named e cess-profts ta ) mposed by
secton 600 of the Interna Revenue Code, as amended, and the smar
e cess-profts ta mposed by secton 602 of the Revenue ct of
1938, and secton 106 of the Revenue ct of 1935 (before and after
amendment by secton 02 of the Revenue ct of 1936), pad or
accrued wthn the ta abe year, are deductbe for the purposes of
computng corporaton norma-ta net ncome (under secton
13(a)2 of the Code, as amended) and e cess profts net ncome
(under secton 711(a) of the Code, as amended) for ta abe years
begnnng after December 31, 1939, but before anuary 1, 19 1. It
s equay cear that the smar e cess-profts ta mposed by sec-
ton 702 of the Revenue ct of 193 , and by secton 216 of the Natona
Industra Recovery ct, s not deductbe for ether of those purposes.
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59
| I9.23(c -1.
Secton 15(a) of the Code, as amended (effectve for ta abe years
begnnng after December 31,19 0) by secton 10 (a) of the Revenue
ct of 19 1, provdes that the term corporaton surta net ncome
means the net ncome mnus a certan mted credt for dvdends
receved.
Secton 23(c) of the Code, as amended (effectve for ta abe years
begnnng after December 31, 19 0) by secton 202(a) of the Revenue
ct of 19 1, provdes n part:
In computng net ncome (here sha be aowed as deductons:
Ta es Generay.
(1) owance n gen-ra Ta es pad or accrued wthn the ta abe
year, e cept
( ) Federa Income ta es:
( ) war-profts and e cess-profts ta es mposed by Tte II of the
Revenue ct of 1 )17, Tte III of the Revenue ct of 1918, Tte III
of the Revenue ct of 1921, secton 218 of the Natona Industra
Recovery ct, or secton 7 - of the Revenue ct of 193 , or by any
such provsons as amended or suppemented;

(2) cess-profts ta under chapter |e -speca rues. For the pur-
poses of ths subsecton. In the case of te e cess-profts ta mposed by
Subchapter of Chapter 2
( ) The deducton sha be mted to the ta mposed for the ta abe
year, but any porton of such ta pad after the ta abe year sha be
consdered as havng been pad wthn the ta abe year;

In the ght of the reevant provsons and egsatve hstory of
the Revenue ct of 19 1, and the ndcated purpose of the amendment
of secton 23(c) of the Code by secton 202(a) of that ct, t s the
opnon of ths offce (hat the decned vaue e cess-profts ta
(orgnay named e cess-profts ta mposed by secton 600 of
the Code, as amended, and the smar e cess-profts ta mposed
by secton 602 of the Revenue ct of 1938, and by secton 106 of the
Revenue ct of 1935 (before and after amendment by secton 02 of
the Revenue ct of 1936), are not ncuded or referred to n secton
23(c) 1( ) of the Code, as amended by secton 202(a) of the Revenue
ct of 19 1, supra; n other words, they are not mposed by the
statutory provsons theren or by any such provsons as amended
or suppemented, wthn the purvew thereof. ccordngy, such
ta es, pad or accrued wthn the ta abe year, are deductbe, for the
aforementoned purposes, for ta abe years begnnng after December
SI. 19 0, as we as for ta abe years begnnng after December 31,
1939, but before anuary 1, 19 1; and are aso deductbe for the
purpose of computng corporaton surta net ncome (under sec-
ton 15(a) of the Code, as amended by secton 10 (a) of the Revenue
ct of 19 1) for ta abe years begnnng after December 31, 19 0.
vrtue of the e press provson n secton 23(c) 1( ) of the Code,
as amended by secton 202(a) of the Revenue ct of 19 1, the smar
e cess-profts ta mposed by secton 702 of the Revenue ct of
1931, and bv secton 216 of the Natona Industra Recovery ct, s
not deductbe for any of those purposes.
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19.23.(c)-2
60
Secton 19.23(c)-2: Federa dutes and e cse 19 2-7-10989
ta es. Mm. 5319
Interna revenue ta es mposed under the Interna Revenue Code
whch consttute aowabe deductons for Federa ncome ta
purposes.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, anuary 26,191 .
Coectors of Interna Revenue, Interna Revenue gents n Charge,
eads of Fed Dvsons of the Technca Staff, Other Offcers and
mpoyees of the ureau of Interna Revenue, and Others
Concerned:
1. Secton 23(c), Chapter 1, of the Interna Revenue Code, as
amended, ncudng the amendment effected by the Revenue ct of
19 1, permts the deducton from gross ncome of a ta es pad or
accrued wthn the ta abe year, e cept
(1)
( ) Federa ncome ta es;
( ) war-profts and e cess-profts ta es mposed by Tte II of the Reve-
nue ct of 1917, Tte III of the Revenue ct of 1918, Tte III of the Revenue
ct of 1921, secton 216 of the Natona Industra Recovery ct, or secton
702 of the Revenue ct of 193 , or by any such provsons as amended or
suppemented;
(C) ncome, war-profts, and e cess-profts ta es Imposed by the authorty
of any foregn country or possesson of the Unted States; but ths deducton
sha be aowed n the case of a ta payer who does not sgnfy n hs return
hs desre to have to any e tent the benefts of secton 131 (reatng to credt
for ta es of foregn countres and possessons of the Unted States) ;
(D) estate, nhertance, egacy, successon, and gft ta es; and
( ) ta es assessed aganst oca benefts of a knd tendng to Increase the
vaue of the property assessed; but ths paragraph sha not e cude the
aowance as a deducton of so much of such ta es as s propery aocabe
to mantenance or nterest charges.
2. ddtona e ceptons to the genera rue regardng the deduct-
bty of ta es pad or accrued durng the ta abe year are the Federa
empoyment ta es eved upon empoyees and empoyee representatves
by the provsons of secton 1 00, 1500, and 1510 of the Code. Such
ta es are specfcay desgnated as not deductbe by the provsons
of sectons 1 02,1503, and 1512, respectvey, of the Code. Nether are
these ta es deductbe, as such, by the empoyers who, athough charged
by aw wth responsbty for deductng the amount thereof from wage
payments made by them to ther empoyees and the payment of such
sums to the coector, are not prmary abe wth respect thereto.
3. The ta es herenafter referred to consttute aowabe deductons
from the gross ncome of the person aganst whom they are eved,
for the ta abe year n whch pad or accrued (dependent upon the
accountng method empoyed by the ta payer), provded the amounts
thereof are not added to or made a part of the busness e penses of such
person, and/or are not added to or made a part of the cost of the
artces or quanttes of merchandse, or of servces, wth respect to
whch such ta es are pad.
. The chapters and sectons of the Code under whch the Federa
nterna revenue ta es are mposed are treated n ths mmeograph n
the order n whch they appear n the Code. The person who s en-
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61
19.23.(c)-2
tted to deduct the partcuar ta s desgnated n each nstance. The
term person as used heren means an ndvdua, a trust, estate,
partnershp, assocaton, company, or corporaton.
C PT R 2. DDITION L INCOM T S.
5. The decared vaue e cess-profts ta mposed by secton 600, Sub-
chapter , Chapter 2, of the Code s an aowabe deducton from the
gross ncome of the person upon whose ncome t s mposed as s the
e cess profts ta mposed by secton 710, Subchapter , Chapter 2, of
the Code. No other ta eved under Chapter 2 of the Code consttutes
sn aowabe deducton.
C PT R 6. C PIT L STOC T .
6. The capta stock ta under secton 1200, Chapter 6, of the Code s
deductbe from gross ncome by the corporaton or other organzaton
upon whch mposed. The ta accrues on the 1st day of the capta
stock ta ta abe year, . e., uy 1, e cept that wth respect to the cap-
ta stock ta ta abe year wthn whch the corporaton s organzed
the ta accrues on date of organzaton.
C PT R 7. T ON TR NSF RS TO OID INCOM T .
7. The ta mposed by secton 1250, Chapter 7, of the Code upon ct-
zens or resdents of the Unted States, domestc corporatons or partner-
shps, or trusts not foregn, who transfer stock or securtes to a foregn
corporaton as pad-n surpus or as a contrbuton to capta, or to a
foregn trust, or to a foregn partnershp, s an aowabe deducton
from the gross ncome of the persons makng such transfers.
C PT R 9. MPLOYM NT T S.
Subchapter . Federa Insurance Contrbutons ct.
8. The ta mposed by secton 1 10, Part II, Subchapter , Chapter
9. of the Code upon an empoyer wth respect to havng ndvduas n
hs empoy, s an aowabe deducton from the gross ncome of the
empoyer. s stated n paragraph 2 of ths mmeograph, the ta
mposed by secton 1 00, Part I, Subchapter , Chapter 9, s not
deductbe from gross ncome for purposes of the Federa ncome fa
ether by the empoyee upon whose ncome t s mposed or by the
empoyer who coects the amount of the ta from the empoyee
through a deducton from the atter s wages. In those nstances whore
the empoyer does not deduct the amount of the ta from the em-
poyee s wages, but pays such amount out of hs own pocket, the
amount of such payment s an aowabe deducton from the gross
ncome of the empoyer not as a ta , but as a busness e pense and
such amount must be ncuded n gross ncome by the empoyee.
Subchapter . mpoyment by Carrers.
9. The ta mposed by secton 1520. Part III, Subchapter , Chapter
9, of the Code upon an empoyer wth respect to havng ndvduas
n hs empoy s an aowabe deducton from the gross ncome of the
empoyer.
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19.23(o)-2.1
62
SU C PT C. F D R L UN MPLOYM NT T CT.
10. The ta mposed by secton 1600, Subchapter C, Chapter 9, of
the Code upon an empoyer wth respect to havng ndvduas n
hs empoy s an aowabe deducton from the gross ncome of the
empoyer. In connecton wth such ta t s to be remembered that
ony the net amount remanng after appcaton of the credts pro-
vded n secton 1601 w be aowabe as a deducton, nasmuch as-
the contrbutons to State unempoyment funds consttutng the meas-
ure of such credts are themseves aowabe deductons from the gross
ncome of the empoyer.
R ILRO D UN MPLOYM NT INSUR NC CT.
11. though contrbutons mposed upon empoyers and em-
poyee representatves by the Raroad Unempoyment Insurance
ct are not mposed under the Interna Revenue Code nor admn-
stered by the ureau of Interna Revenue and are, therefore, not
wthn the scope of ths mmeograph under a strct constructon of
the denned fed, but because the contrbutons themseves and ther
ncdents and measurements are strkngy smar to the ta mposed
by secton 1600 of the Code t s deemed advsabe to advert thereto
at ths pont. Such contrbutons consttute aowabe deductons
from the gross ncome of the empoyers or empoyee representatves
upon whch they are mposed.
MPLOY S T S UND R C PT R 9.
12. Whe not deductbe, as such, by ether the empoyees or the
empoyers, as ponted out n paragraph 2 of ths mmeograph, and to
that e tent aso not germane to the sub|ect of ths mmeograph, the
amount of the ta es upon the ncomes of empoyees provded for n
secton 1 00, Part I, Subchapter , Chapter 9, of the Code and n
secton 1500, Part I, Subchapter P , Chapter 9, of the Code may const-
tute aowabe deductons from the gross ncome of the empoyer con-
cerned as usness e penses under secton 23(a) 1 Chapter I. of
the Code n case the empoyer pays such sums out of hs own pocket.
In that event the amounts so pad consttute addtona compensaton
to the empoyees concerned and must be ncuded n ther gross ncomes
for Federa ncome ta purposes.
C PT R 10. DMISSIONS ND DU S.
Subchapter . dmssons.
13. The ta es on admssons under secton 1700 (a) and (b) of
Subchapter , Chapter 10, of the Code, as amended, are mposed upon
the amount pad for admsson, and are payabe by the person payng
for the admsson. Such ta es, accordngy, are deductbe from gross
ncome ony by the purchaser. Where an amount s pad n e cess of
the reguar or estabshed prce of admsson, whether n saes made
at the bo offce or at paces other than the bo offce, the e cess amount
s sub|ect to the addtona ta es mposed by subsectons (c) and (d)
of secton 1700. These addtona ta es are payabe by the person
seng the admsson at the e cess prce, and consequenty such add-
tona ta es are deductbe from gross ncome ony by the seer.
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63
19.23(o)-2
1 . The ta on admssons to any roof garden, cabaret, or smar
pace of entertanment as mposed by secton 1700(e) pror to the
amendment of such secton by secton 5 2 of the Revenue ct of 10 1.
s payabe by the person payng for the admsson. ffectve as o
10 a. m. on October 1, 19 1, secton 5 2 of the Revenue ct of 19 1
amended secton 1700(e) so as to change the bass for ta computaton
and to shft the abty for the tu to the person recevng the pay-
ment for admsson, refreshment, servce, and merchandse. ence,
cabaret ta es pad pror to 10 a. m. on Oc tober 1,19 1, are deductbe
from gross ncome by the person (. e., the patron) payng for the
admsson, whe cabaret ta es pad subsequent to 10 a. m. on Octo-
ber 1. 19 1, are deductbe from gross ncome by the person (. e., the
propretor or cabaret operator) recevng the payment for adms-
son, etc.
Subchaptkk . Dues.
15. The ta on dues or membershp fees and on ntaton fees m-
posed by secton 1710, Subchapter , Chapter 10, of the Code on
members of soca, athetc, or sportng cubs or organzatons, s m-
posed upon and s deductbe from gross ncome ony by the member.
C PT R 11. DOCTM NT8. OT INSTRUM NTS, ND PL YING C RDS.
16. The severa documentary stamp ta es mposed under Subchap-
ter , Chapter 11, of the Code by secton 1800 and
(a) Secton 1801 on the s ue of corporate securtes, . e., bonds,
debentures, certfcates of ndebtedness, etc.;
(b) Secton 1802(a) on the ssue of capta stock and smar
nterests;
(c) Secton 1802(b) on saes and transfers of capta stock and
smar nterests;
(d) Secton 180 on certan foregn nsurance poces;
e) Secton 1805 on transfers of nterests n sver buon; and
(/) Secton 1806 on certan passage tckets;
appy wth respect to any party to the ta abe transacton. such
ta es, therefore, are deductbe from gross ncome by the person who
as a party to the transacton, whether drecty or ndrecty through
an agent, purchased the stamps from the Government and used them
n payment of the ta by aff ng them to the document or sub|ect of
the ta and canceng them as requred by the aw and reguatons.
17. The partes to a ta abe transacton may agree among themseves
as to whch one sha pay the ta . Such agreement, however, does not
affect the ta abty of the partes and does not reeve any one of
them from payng the ta . ence, where such an agreement s made
but through defaut the ta s pad by a party other than the one who
had agreed to make the payment, the ta s nevertheess deductbe from
the gross ncome of the person who made the payment ; and such deduc-
ton s aowabe notwthstandng that the person who made the pay-
ment may be entted to cam rembursement from the party n defaut.
If n such case the person payng the ta s rembursed by the party n
defaut, the amount of the rembursement woud be ncudbe n hs
gross ncome.
18. Where the ta s pad by one of the partes to the. transacton but
the burden of the ta s shfted to another party to the transacton
for e ampe, where the amount of the ta s ncuded n the saes prce
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19.23(c)-2.
0
of the sub|ect matter of the ta the other party to the transacton s
not the ta payer entted to deduct the amount of the ta as such from
hs gross ncome. The other party to whom the burden of the ta was
shfted s entted to add the amount thereof to the cost of the sub|ect
matter of the ta for purpose of computng hs gross ncome from the
sae, use, or other dsposton thereof.
19. The ta on payng cards mposed by sectons 1800 and 1807, Sub-
chapter , Chapter 11, of the Code s mposed on the manufacturer
as that term s denned n secton 1831(a) and s deductbe from gross
ncome ony by such person. |obber, deaer, or consumer who rem-
burses the manufacturer for such ta , even though requred to do so by
terms of the contract under whch such artces are acqured, s not
entted to deduct from gross ncome the amount so rembursed as a
payment of ta ; but may add such amount to the cost of the artces
for purpose of computng hs gross ncome from the sae, use, or other
dsposton of the artces.
C PT R 12. S F D POSIT O S.
20. The ta on safe depost bo es mposed by secton 1850, Chap-
ter 12, of the Code s mposed on the person payng for the use of the
safe depost bo and s deductbe from gross ncome ony by such
person.
C PT R 13. CIRCUL TION OT R T N OF N TION L N S.
21. The ta on the amount of crcuaton ssued by any bank, asso-
caton, corporaton, company, or person, mposed by secton 1900,
Chapter 13, of the Code s mposed on the bank, etc., ssung the crcu-
aton and s deductbe from gross ncome ony by such bank, etc.
C PT R 1 COTTON FUTUR S.
22. The ta upon each contract of sae of any cotton for future
devery mposed by secton 1920, Chapter 1 , of the Code s mposed
upon the seer of the cotton nvoved n the contract of sae and s
deductbe from gross ncome ony by such person.
C PT R 15 TO CCO, SNUFF, CIG RS, ND CIG R TT S.
23. The ta es mposed by secton 2000, Chapter 15, of the Code upon
a tobacco, snuff, cgars, cgarettes, and cgarette paper manufactured
n or mported nto the Unted States, and sod by the manufacturer
or mporter, or removed for consumpton or sae, are mposed upon the
manufacturer or mporter and are deductbe from gross ncome ony
by such person.
2 . The foor stocks ta on cgarettes hed by any person for sae
on uy 1, 19 0, mposed by secton 2005 of the Code, as added b-
secton 212 of the Revenue ct of 19 0, s payabe by the person so hod-
ng cgarettes and s deductbe from gross ncome ony by such person.
C PT R 16. OL OM RG RIN . DULT R T D UTT R, ND PROC SS O
renovated butter.
Subchapter a. Oeomargarne.
25. The ta es mposed by secton 2301, Subchapter , Chapter 16, of
the Code upon oeomargarne whch s manufactured and sod, or
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19.23(c)-2.
removed for consumpton or use, are mposed upon the manufacturer
thereof and are deductbe from gross ncome ony by such person.
Subchapter . duterated and Process ob Renovated utter,
26. The ta es mposed by secton 2321, Subchapter , Chapter 16, of
the Code upon aduterated butter and upon process or renovated butter,
whch s manufactured or sod, or removed for consumpton or use, are
mposed upon the manufacturer thereof and are deductbe from gross
ncome ony by such person.
C PT R 17. FILL D C S .
27. The ta mposed by secton 2351, Chapter 17, of the Code upon
fed cheese whch s manufactured s mposed upon the manufacturer
thereof and s deductbe ony by such person.
C PT R 18. MI D FLOUR.
28. The ta mposed by secton 2381, Chapter 18, of the Code upon
the manufacture and sae of m ed four s mposed upon the manu-
facturer or packer thereof and s deductbe from gross ncome ony
by such person.
29. The ta mposed by secton 238 , Chapter 18, of the Code upon
a m ed fours, mported from foregn countres, s mposed upon the
mporter thereof and s deductbe from gross ncome ony by such
person.
C PT R 19. R T IL RS CIS T S.
30. (a) The retaers e cse ta es mposed by sectons 2 00, 2 01,
and 2 02 of Chapter 19 of the Code, as added by secton 552 of the
Revenue ct of 19 1, are payabe by the person seng the ta abe
artces at reta, and are deductbe from gross ncome ony by such
person. In genera, the artces sub|ect to the retaers e cse ta es
are as foows:
(1) The ta mposed by secton 2 00 appes to artces com-
mony or commercay known as |ewery, whether rea or mtaton;
pears, precous and semprecous stones, and mtatons thereof; ar-
tces made of, or ornamented, mounted or ftted wth, precous metas
or mtatons thereof; watches and cocks and cases and movements
therefor; god, god-pated, sver, sver-pated or sterng fatware
or hoow ware; opera gasses; orgnettes; marne gasses; fed gasses;
and bnocuars.
(2) The ta mposed by secton 2 01 appes to rtces made of
fur on the hde or pet, and artces of whch such fur s the component
matera of chef vaue.
(3) The ta mposed by secton 2 02(a) appes to toet prepara-
tons, . e., Perfumes, essences, e tracts, toet waters, cosmetcs,
etroeum |ees, har ok, pomades, har dressngs, har restoratves,
ar dyes, aromatc cachous, toet powders, and any smar substance,
artce, or preparaton, by whatsoever name known or dstngushed;
any of the above whch are used or apped or ntended to be used or
apped for toet purposes.
(b) Secton 2 02(b) provdes n part that the sae of any of the
artces descrbed n secton 2 02(a) to any person operatng a barber
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S 19.23 (c)-2.1
66
shop, beauty paror, or smar estabshment (referred to hereafter
as beauty paror) sha be consdered a sae at reta. s to such
saes, the ta s payabe by the person, . e., manufacturer, |obber,
or deaer, seng the ta abe artces to the beauty paror, and s
deductbe from gross ncome ony by such person.
(c) beauty paror does not ncur any e cse ta abty on ts
use of toet preparatons n gvng treatments to patrons. owever,
secton 2 02(b) further provdes that a resae of toet preparatons
by a beauty paror sha aso be sub|ect to ta as a sae at reta, and
that there sha be credted aganst the ta payabe wth respect to
such resae the amount of ta pad on the sae to the beauty paror.
s to such saes, the ta s payabe by the person operatng the beauty
paror, and s deductbe from gross ncome ony by such person, but
the deducton s mted to the net ta payabe by the beauty paror,
or the amount due after appyng as a credt the ta pad on the sae
to the beauty paror of the toet preparatons resod by t.
(d) Where the e cse ta pad by a manufacturer, |obber, or deaer
wth respect to toet preparatons used by a beauty paror n gvng
treatments to patrons s passed on to the beauty paror, the ta becomes
a part of the cost of the materas used by the beauty paror, and as
such may be ncuded n the operatng e penses of the Deauty paror
aowabe as ncome ta deductons. Where the e cse ta pad by
a manufacturer, |obber, or deaer wth respect to toet preparatons
resod by a beauty paror s passed on to the beauty paror, the ta
becomes a part of the cost of the toet preparatons resod by the beauty
paror, and as such may be ncuded by the beauty paror n the cost
of goods sod for ncome ta purposes. The ta so passed on to the
beauty paror by ts supper of the toet preparatons s propery
ncudbe n ts cost of goods sod; notwthstandng that such ta s
aso apped as a credt n determnng the net amount of the retaers
e cse ta payabe by the beauty paror on ts resae of the toet
preparatons.
C PT R 21. COCONUT ND OT R G T L OILS.
31. cept as provded n secton 2 78 of such chapter, the ta es
mposed by secton 2 70, Chapter 21, of the Code upon the frst domestc
processng of coconut and the other vegetabe os specfed n that
secton are mposed upon the frst domestc processng thereof as
defned n secton 2 77 of that chapter and those ta es are deductbe
from gross ncome ony by the person performng the frst domestc
processng.
32. Secton 2 78, Chapter 21, of the Code provdes that under the
crcumstances set forth theren the abty for the ta es mposed
under the chapter shfts from the person performng the frst domes-
tc processng to hs vendee. In such a case t necessary foows
that the ta s deductbe from the gross ncome of the vendee rrespec-
tve of whether the amount of the ta s pad by the vendee to the
vendor or drect by the vendee to the coector.
C PT R 22. FIS , NIM L, N G T L OILS.
33. The ta es mposed by secton 2 90, Chapter 22, of the Code at the
rates and upon the substances enumerated n that chapter are mposed
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19.23(o)-2.
upon the mportaton thereof nto the Unted States after May 10,
193 , and are a abty of the mporter. ccordngy, such ta es are
deductbe from gross ncome ony by the mporter.
C PT R 28. N RCOTICS.
Subchapter . Opum and Coca Leaves.
3 . The ta mposed by secton 2550, Subchapter , Chapter 23, of
the Code upon opum, coca eaves, any compound, sat, dervatves, or
preparaton thereof, produced n or mported nto the Unted States,
and sod, or removed for consumpton or sae, s mposed upon the
mporter, manufacturer, producer, or compounder, and s deductbe
from gross ncome ony by such person.
Subchapter . Opum for Smokng.
35. The ta mposed by secton 2567, Subchapter , Chapter 23, of
the Code upon a opum manufactured n the Unted States for
smokng purposes s mposed upon the manufacturer thereof and s
deductbe from gross ncome ony by such person.
Subchapter C. Marhuana.
36. The ta es mposed by secton 2590, Subchapter C, Chapter 23, of
the Code upon the transfers of marhuana descrbed theren are mposed
n genera upon the transferee and are deductbe from gross ncome
ony by such person. owever, n the event of a transfer n voaton
of secton 2591 wthout an order form and wthout payment of the
transfer ta mposed upon the transferee, the transferor aso s abe
for the ta and f pad by such transferor the amount thereof may be
deducted from hs gross ncome.
C PT R 2 . W IT P OSP ORDS M TC S.
37. The ta mposed by secton 2651, Chapter 2 , of the Code upon
whte phosphorus matches manufactured, sod, or removed s mposed
upon the manufacturer of such matches and s deductbe from gross
ncome ony by such person.
C PT R 25. FIR RMS.
Subchapter . Pstos and Revovers.
38. The ta mposed by secton 2700, Subchapter , Chapter 25, of
the Code upon pstos and revovers soa or eased by the manufacturer,
producer, or mporter s mposed upon the manufacturer, producer, or
mporter and s deductbe from gross ncome ony by such person.
Subchapter . Machne Guns and Short- arreed Frearms.
39. The ta es mposed by secton 2720, Subchapter , Chapter 25, of
the Code upon frearms transferred n the contnenta Unted States
are mposed upon the transferor and are deductbe from gross ncome
ony by such person.
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19.23(c)-2.
68
C PT R 26 LI UOR.
Subchapter . Dsted Sprts.
0. The ta es mposed by secton 2800, Subchapter , Chapter 26, of
the Code upon dsted sprts as denned n such secton are mposed
upon the dster or mporter or nterna revenue bonded warehouse-
man and are deductbe from gross ncome ony by such person.
Subchapter . Wnes.
1. The ta es mposed by secton 3030, Subchapter , Chapter 26, of
the Code upon the varous knds of wnes specfed theren are mposed
upon the sae or the remova for consumpton or sae of such wnes and
are, therefore, a abty of the producer or mporter. Consequenty,
the amount of such ta es may be deducted from gross ncome ony by
the producer or mporter or propretor of a bonded storeroom upon
whom such abty rests.
2. The ta mposed by secton 3031, Subchapter , Chapter 26, of
the Code upon brandy or sprts used n the fortfcaton of wnes s
mposed upon the producer of such wnes and s deductbe from gross
ncome ony by such person.
SU O PT D. F RM NT D LI UORS.
3. The ta mposed by secton 3150, Subchapter D, Chapter 26, of
the Code upon the fermented quors desgnated theren s mposed
upon the brewng or manufacture and sae, or remova for consumpton
or sae, wthn the Unted States, and s a abty of the brewer. c-
cordngy, the amount of such ta es may be deducted from gross ncome
ony by the brewer.
C PT R 27 OCCUP TION L T S.
. The speca ta es mposed by secton 3200,3206,3210, 3215.3220,
3230, 3250, 3260 of Subchapter , Chapter 27, of the Code, and by sec-
tons 3267 and 3268, as added to such Subchapter by sectons 555 and
556 of the Revenue ct of 19 1, are mposed upon the persons engaged
n the occupatons specfed n each of those sectons and are deductbe
from gross ncome ony by such persons.
C PT R 29. M NUF CTUR RS CIS ND IMPORT T S.
SU C PT R . M NUF CTUR RS CIS T S.
5. The manufacturers e cse ta es mposed upon the artces spec-
fed n sectons 3 00, 3 01, 3 03, 3 0 , 3 05, 3 06, 3 07, 3 09, 3 12, and
3 13, whch are sted beow, are mposed upon the manufacturer, pro-
ducer, or mporter and are deductbe from gross ncome ony by such
persons:
(a) Secton 3 00. Tres and nner tubes.
(6) Secton 3 01. Toet preparatons. (Termnated effectve as of October 1,
19 1.)
(c) Secton 3 03. utomobes, trucks, busses, traers, motorcyces, and parts
and accessores therefor.
(d) Secton 3 0 . Rado recevng sets, phonographs, phonograph records, and
musca nstruments.
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69
19.23(c)-2
(e) Secton 3 05. Refrgerators, refrgeratng apparatus, and ar-condtoners.
(/) Secton 3 06(a) (1). Sportng goods.
(g) Secton 3 06(a) (2). Luggage.
(ft) Secton 3 06(a) (3). ectrc, gas, and o appances.
() Secton 3 06(a) ( ). Photographc apparatus.
(/) Secton 3 06(a) (5). ectrc sgns.
(fc) Secton 3 06(a)(6). usness and store machnes.
(I) Secton 3 0(5(a) (7). Rubber artces.
(m) Secton 3 06 (a)(8) . Washng machnes.
(n) Secton 3 06(a) (9). Optca equpment.
(o) Secton 3 06(a) (10) ectrc ght bubs and tubes.
(p) Secton 3 07. Frearms (e cept those ta ed under sectons 2700 and 2720),
shes, and cartrdges.
( ) Secton 3 09. Matches,
(r) Secton 3 12. Gasone.
( ) Secton 3 13. Lubrcatng os.
6. The foor stocks ta on tres and tubes hed by any person for
sae on October 1, 19 1, mposed by secton 3 00(b) of the Code,
as added by secton 535(c) of the Revenue ct of 19 1, and the
foor stocks ta on matches hed by any person for sae on October
1, 19 1, mposed by secton 3 09(b) of the Code, as added by secton
5 7 of the Revenue ct of 19 1, are payabe by the persons who so
hed the respectve ta abe artces and are deductbe from gross
ncome ony by such persons.
7. The ta mposed upon eectrca energy by secton 3 11, Sub-
chapter , Chapter 29. of the Code s mposed upon the vendor of
such energy and s deductbe from gross ncome ony by such
person.
C PT R 30. TR NSPORT TION ND COMMUNIC TION.
Subchapter . Transportaton of Oh. hy Ppe Lne.
8. The ta mposed by secton 3 60, Subchapter , Chapter 30,
of the Code upon the transportaton of crude petroeum and qud
products thereof by ppe ne s mposed upon the person furnshng
such transportaton and s deductbe from gross ncome ony by
such person.
Subchapter . Teegraph, Teephone, Rado, and Cabe Factes.
9. The severa ta es mposed by secton 3 65, Subchapter , Chap-
ter 30, of the Code, as amended by secton 5 8 of the Revenue ct
of 19 1, wth respect to teephone or rado teephone messages; tee-
graph, cabe, or rado dspatches; eased wre, and teetypewrter, or
takng crcut speca servce; any wre and equpment servce, n-
cudng stock quotaton amd nformaton servces, burgar aarm or
fre aarm servce; and oca teephone servce are mposed upon
the person payng for the servces or factes and are deductbe
from gross ncome ony by such person.
Subchapter C. Transportaton of Persons.
50. The ta es mposed by secton 3 C9, Subchapter C, Chapter 30,
of the Code, as added by secton 55 of the Revenue ct of 19 1,
wth respect to amounts pad wthn the Unted States for trans-
portaton of persons by ra, motor vehce, water, or ar, and to
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S 19.23fc)-2.
70
amounts pad for seatng or seepng accommodatons n connecton
wth such transportaton, are mposed upon the person payng for the
servces or factes and are deductbe from gross ncome ony by
such person.
C PT R 31. DOCUM NTS ND OT R INSTRUM NTS.
51. The ta es mposed by secton 3 80, Chapter 31, of the Code for
and n respect of the documents and other nstruments mentoned and
descrbed n sectons 3 81 and 3 82 are sub|ect to the same admns-
tatve provsons that appy to the stamp ta es mposed under Chap-
ter 11 wth respect to documents, other nstruments, and payng cards.
ccordngy, the rues stated n paragraph 16 reatve to the stamp
ta es mposed under Chapter 11 aso appy to the stamp ta es mposed
under Chapter 31.
C PT R 32. SUG R.
Subchapter . Manufacture.
52. The ta es mposed by secton 3 90, Subchapter , Chapter 32.
of the Code upon manufactured sugar manufactured n the Unted
States are mposed upon the manufacturer as defned n secton 3 92
and are deductbe from gross ncome ony by such person.
C PT R 33. ITUMINOUS CO L.
53. The ta mposed by secton 3520, Chapter 33, of the Code upon
the sae or other dsposa of btumnous coa produced wthn the
Unted States when sod or otherwse dsposed of by the producer s
mposed upon the producer and s deductbe from gross ncome ony
by such person.
C PT R 83 . US OF MOTOR ICL S ND O T3.
5 . The ta es mposed by secton 35 0 of the Code upon the use of
motor vehces and boats s a abty, n the case of motor vehces,
of the person n whose name the vehce s, or s requred to be, regs-
tered, and n the case of boats, of the owner. The ta es n queston
are deductbe from gross ncome ony by the persons named.
G N R L.
55. The defense ta supermposed upon varous of the ta es
mposed under the Code for years pror to 19 1 s, for purposes of ths
mmeograph, merey an addton to the ta to whch t attaches and s
deductbe, or not, n the same manner and to the same e tent as s
the ta to whch t s added.
56. Mmeograph 5200 (C. . 19 1-2, 80) s revoked. Correspond-
ence regardng ths mmeograph shoud refer to the number thereof
and to the symbos IT: TM.
Norman D. Cann,
ctng Commssoner.
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71
5 19.23 (c)-2.
Secton 19.23(c)-2: Federa dutes and e cse 19 2-11-1102
ta es. I. T. 3539
( so Secton 23(a), Secton 19.23(a)-.)
INT RN L R NU COD .
Where the owner of a con-operated amusement or gamng devce
pays to the occupant of the premses on whch the devce s ocated
the amount of the ta mposed by secton 3267(a) of the Interna
Revenue Code, as added by secton 555 of the Revenue ct of 19 1,
such owner may deduct the amount as a busness e pense for
Federa ncome ta purposes.
The amount so receved by the occupant of the premses const-
tutes addtona Income to hm, but he s entted to deduct such
amount as a ta n hs Federa ncome ta return. If the occupant
of the premses s aso the owner of the devce, the ta mposed
by secton 32t7(a of the Code may te deducted as a ta for Fed-
era Income tu purposes n the year when pad or accrued, de-
pendng upon the method of accountng empoyed.
dvce s requested wth respect to the deducton for Federa
ncome ta purposes of the speca ta mposed by secton 3267(a)
of the Interna Revenue Code, as added by secton 555 of the Revenue
ct of 19 1, on con-operated amusement and gamng devces. The
nqury refers partcuary to cases where the occupant of the
premses on whch the machne (devce) s ocated s not the owner
of the machne, and the atter, n order to satsfy the former, pays
the amount of the ta to hm n order that the machne may be a-
owed to operate on such premses.
Secton 3267(a) of the Interna Revenue Code, supra, mposes a
speca ta upon every person who mantans for use, or permts
the use of, a con-operated amusement or gamng devce on any
pace or premses occuped by hm. Secton 3267(b) of the Code
defnes the term con-operated amusement and gamng devces
as meanng certan descrbed types of machnes, and secton 3267(c)
of the Code provdes that an operator of a pace or premses who
mantans for use or permts the use of any con-operated devce
sha be consdered, for the purposes of Subchapter (genera pro-
vsons reatng to regstraton, payment of ta , returns, etc.), to
be engaged n a trade or busness n respect of each such devce.
Secton 323.21 of Reguatons 59 (19 1 edton), whch secton
reates to persons abe for ta , provdes that every person who
mantans for use or permts the use of, a con-operated amusement
or gamng devce on any pace or premses occuped by hm, s
abe to speca ta , and that an operator of such pace or premses
s consdered; for the purposes of the aw, to become engaged n a
trade or busness n respect of each such devce as of the day the
devce s paced on hs premses for use thereon.
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 states that
n genera ta es are deductbe ony by the person upon whom they
are mposed.
In vew of the foregong, t s hed that the owner of a con-operated
amusement or gamng devce, who pays to the occupant of the prem-
ses on whch the devce s ocated the amount of the ta mposed
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19.23(k)-.
72
by secton 3267(a) of the Interna Revenue Code (as added by secton
555 of the Revenue ct of 19 1) on such devces, may, for Federa
ncome ta purposes, deduct such amount as a busness e pense under
secton 23(a) of the Code. The amount so receved by the occupant
of the premses consttutes addtona ncome to hm, but he s en-
tted to deduct such amount as a ta n hs Federa ncome ta
return. If the occupant of the premses s aso the owner of the
devce, the ta mposed by secton 3267(a) of the Code, supra, may
be deducted as a ta for Federa ncome ta purposes n the year
when pad or accrued, dependng upon the method of accountng
empoyed. (See paragraph of Mm. 5319, page 60, ths uetn;
see generay I. T. 3382, C. . 19 0-1, 12, and rungs theren cted.)
S CTION 23(k). D DUCTIONS FROM GROSS
INCOM : D D TS.
Secton 19.23 (k)-: ad debts. 19 2-13-11036
I. T. 35 2
INT RN L R NU COD .
Where a debt has been charged off and deducted from gross
ncome n a partcuar year and the deducton s dsaowed by the
ureau because the debt was not actuay worthess n that year, the
ta payer s entted to the deducton n the ater year when ts worth-
essness s defntey ascertaned.
dvce s requested whether the M Company w be entted to a
deducton for bad debts n a ater year where such debts were charged
off and deducted from gross ncome n the year n whch the ta payer
consdered the debts to be worthess, but the ureau dsaowed the
deducton on the ground that the worthessness thereof was defntey
ascertanabe n the ater year.
The M Company owns a the outstandng debentures of the N
Company whose chef assets are ts stock hodngs n varous sub-
sdares ocated n enemy and enemy-occuped countres. The M Com-
pany s of the opnon that such debentures became worthess n 19 1
and were propery charged off and deducted from gross ncome for
that year, but n order to avod any controversy whch mght arse
n the event of a determnaton by the ureau at a ater date that the
debentures became worthess n a year subsequent to 19 1, nqury s
made whether the charge-off n 19 1 w support the deductons n
the year or years n whch such tems are defntey ascertaned to be
worthess.
Secton 23(k) of the Interna Revenue Code provdes:
(1) Genera Rue. Debts ascertaned to be worthess and charged off wthn
the ta abe year (or, n the dscreton of the Commssoner, a reasonabe add-
ton to a reserve for bad debts) ; and when satsfed that a debt s recoverabe
ony n part, the Commssoner may aow such debt, n an amount not n e cess
of the part charged off wthn the ta abe year, as a deducton. Ths para-
graph sha not appy n the case of a ta payer, other than a bank, as defned n
secton 10 , wth respect to a debt evdenced by a securty as defned n paragraph
(3) of ths subsecton.
(2) Securtes ecomng Worthess. If any securtes (as defned n para-
graph (3) of ths subsecton) are ascertaned to be worthess and charged off
wthn the ta abe year and are capta assets, the oss resutng therefrom sha,
n the case of ta payer other than a bank, as defned n secton 10 , for the
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73
S 19.23(k)-.
purposes of ths chapter, be consdered as a oss from the sae or e change,
on the ast day of such ta abe year, of capta assets.
(3) Defnton of Securtes. s used In ths subsecton the term secur-
tes means 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.
In Georga ngneerng Co. v. Commssoner (21 . T. .. 532,
acquescence, C. . -. 2 (1931)), t was hed that n debt whch
was charged off n 1921, but dened as a deducton for that year on the
ground that t was not actuay ascertaned to be worthess n that
year, dd not deprve the ta payer of the deducton n 1923 when the
facts showed that t was actuay worthess n 1923. The oard sad
(page 5 8) :
The fact that the pettoner camed that t had ascertaned the
worthessness of the debt n 1921 does not deprve t of the deducton In 1923
when the facts show that t was actuay worthess n 1 23. The ascertanment,
that s, the fndng out or makng certan of the fact, occurred In 11 23. The fact
aso appears that n 1923 the debt had aready been charged off and remaned
charged off. In that year, therefore, the two requrements as to ascertanment
of worthessness and charge-off e sted.
In vew of the above, t s hed that where a debt has been charged
off and deducted n a partcuar year and the deducton s dsaowed
by the ureau on the ground that the debt was not worthess n that
year, the ta payer s entted to the deducton n the ater year when ts
worthessness s defntey ascertaned.
Secton 19.23(k)-: ad debts. 19 2-16-11060
T. D.5136
TITL 26 INT RN L R NU C PT R I, SU C PT R . P RT 19.
INCOM T .
Deducton n respect of bad debt charged off In prevous ta abe
year. Reguatons 103 amended.
Treasury Department.
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
Secton 19.23(k)-(6) s amended by nsertng after the second
sentence thereof the foowng new sentence:
If a ta payer cams a deducton for a debt for the ta nbc year wthn whch the
debt s charged off and such deducton s dsaowed for such year, a deducton may
be aowed for a subsequent ta abe year wthn whch the debt s ascertaned to
be worthess, the charge-off n the pror year, f consstenty mantaned as such,
beng suffcent to meet the requrement of the Interna Revenue Code.
(Ths Treasury decson s ssued under the authorty contaned n
secton 62 of the Interna Revenue Code (53 Stat., 32, 26 U. S. C, 19 0
ed., 62).)
Guy T. everno,
Commssoner of Interna Revenue.
pproved pr 10,19 2.
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster pr 13, 19 2, 11.15 a. m.)
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19.23(10-1.
7
Secton 19.23(k)-: ad debts. 19 2-18-11076
( so Secton 117, Secton 19.117-1.) I. T. 35 8
INT RN L R NU COD ND PRIOR R NU L WS.
Treatment for Federa Income ta purposes of a transacton
whereby a credtor accepts a vountary conveyance of property, In-
cudng property pedged as securty for the debt n parta or n
fu satsfacton of the unpad porton of the ndebtedness.
I. T. 3121 (C. . 1937-2, 138) modfed nnd I. T. 3167 (C. .
1938-1, 190) revoked.
In Commssoner v. Svreckes (120 Fed. (2d), 517, Ct. D. 155 ,
page 201, ths uetn), the queston presented was whether a transac-
ton n whch the ta payer (credtor) surrendered promssory notes
and coatera securty n consderaton of a deed to certan rea estate,
aso mortgaged to her as securty for the notes, resuted n a capta
oss, an ordnary oss, or a bad debt. The court hed that the trans-
acton resuted n a bad debt for whch the ta payer was entted to
a deducton under secton 23(k) of the Revenue ct of 193 n the
amount of the dfference between the sum due and the far market
vaue of the rea estate. The decsons n ngham v. Commssoner
(105 Fed. (2d), 971) and Commssoner v. Natona ank of Com-
merce of San ntono, Te . (112 Fed. (2d), 9 6), are n accord wth
the decson n the Spreckes case.
The above-cted decsons |ustfy the adopton of a genera rue
that where a credtor accepts a vountary conveyance of property,
ncudng property pedged as securty for the debt, n parta or n
fu satsfacton of the unpad porton of the ndebtedness, the recept
of the property so conveyed, to the e tent of ts far market vaue
at that tme, sha be consdered as the recept of payment on the
obgatons satsfed. If the vaue of such property s ess than the
bass of such obgatons, the dfference may be deducted for Federa
ncome ta purposes as a bad debt f ascertaned to be worthess and
charged off wthn the ta abe year, e cept that f the obgatons sat-
sfed are securtes (as defned n sectons 23(k)3 and f(f) of the
Interna Revenue Code and correspondng provsons of pror reve-
nue aws), any gan or oss resutng from the transacton s a capta
gan or oss sub|ect to the provsons of secton 117 of the Interna
Revenue Code and correspondng provsons of pror revenue aws.
If the property so acqured s subsequenty sod, the bass for deter-
mnng gan or oss s the far market vaue of the property at the
date of acquston. (See secton 19.23 (k)-3 of Reguatons 103
and smar provsons of pror reguatons whch reate to property
acqured n a forecosure proceedng as dstngushed from that ac-
qured through a vountary conveyance.)
Secton 19. - of Reguatons 103 and correspondng artces of
pror reguatons have been amended by Treasury Decson 5113 page
88, ths uetn to permt the appcaton of the above-stated rue to
cases nvovng deferred payment saes of rea property not on the
nstament pan.
In I. T. 3121 (C. . 1937-2, 138) t was hed, among other thngs,
that where a debt secured by a mortgage s compromsed by the
debtor transferrng tte to the mortgaged property to the credtor
n e change for a reease of the debtor from hs obgaton to the
credtor, the oss, f any, sustaned by the credtor s to be treated
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75
19.23(m)-16.
as arsng from a sae or e change of a capta asset, and s thus
mted by secton 117 of the Revenue cts of 193 and 1936. I. T.
3121, supra, hods further that the oss, f any, s measured by the
dfference between the bass of the obgatons of the debtor n the
hands of the credtor and the far market vaue of the property.
In I. T. 3167 (C. . 1938-1,190) t was hed (syabus) that where
stock s hed by a credtor as securty for a debt and the debt s
compromsed by the debtor transferrng tte to the stock to the
credtor n e change for a reease of the debtor from hs obgaton,
the oss, f any, sustaned by the credtor shoud be treated as arsng
from an e change of an asset, and such oss s sub|ect to the mta-
ton contaned n secton 117(d) of the Revenue ct of 1936 f the
stock s a capta asset wthn the defnton of secton 117(b)
of that ct.
In vew of the adopton of the rue set forth heren, I. T. 3121,
supra, s modfed and I. T. 3167, supra, s revoked.
The concuson reached heren s, of course, appcabe to cases n
whch a credtor accepts securtes n payment of an ndebtedness. In
appyng such concuson, t s mportant to dstngush cases n
whch a debt s pad from cases n whch the credtor ses or other-
wse transfers the ndebtedness to a thrd party.
S CTION 23(1). D DUCTIONS FROM GROSS
INCOM : D PR CI TION.
Secton 19.23(1)-1: Deprecaton.
INT RN L R NU COD .
utomobes owned and used by rura ma carrers n devery of
ma. (See L T. 35 1, page 1.)
S CTION 23 (m). D DUCTIONS FROM GROSS
INCOM : D PL TION.
Secton 19.23(m)-16: Charges to capta and 19 2-1-109 7
to e pense n the case of o and gas wes. G. C. M. 2303
INT RN L R NU COD ND R NU CTS OF 1932, 193 . 1936. ND 1938.
The opton granted by secton 1923(m)-16(o) of Reguatons
103 to charge to e pense ntangbe drng and deveopment costs
Incurred by o and gas operators ncudes amounts pad to an
ndependent contractor for the drng of a we under a
footage contract, uness such contract Is a turnkey con-
tract. Payments to a contractor under a contract that s nether a
turnkey nor a footage contract are capta e pendtures If the con-
tractor s an ndependent contractor, but may be charged to
e pense under the opton f the contractor s an empoyee or agent
of the operator rather than an ndependent contractor.
n opnon s requested whether n vew of recent decsons by
the oard of Ta ppeas, amounts pad an ndependent contractor
for the drng of an o we on a footage bass may be deducted as n-
tangbe drng and deveopment costs under secton 19.23(m)-
16(a) of Reguatons 103.
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19.23(m)-16.
76
The opton to charge to e pense ntangbe drng and deveop-
ment costs contaned n the cted reguaton was frst granted n
paragraphs 502 and 503, artce 170, of Reguatons 33, revsed,
approved October 3, 1917, and n artce 223 of Reguatons 5.
When the opton was frst granted producers generay were dong
ther own drng. Soon thereafter ndependent contractors be-
came engaged n the we-drng busness and have deveoped an
estabshed ndustry based upon the status of ndependent contractor.
In Od Farmers O Co. v. Commssoner (12 . T. ., 203,
acquescence, C. . II-2, 30 (1928)), amounts pad contractors n
accordance wth turnkey contracts under whch the contractors
furnshed a casng| fue, and materas, and turned over the com-
peted wes to pettoner for a stpuated prce were hed not
deductbe under the opton, the oard statng that payment for
wes when competed bear no resembance to payments for wages,
fue, repars, haung, etc.
The dstncton drawn by the cted decson has been consstenty
foowed by the oard n subsequent cases. mounts pad to a con-
tractor under a turnkey contract have been consstenty dsa-
owed as e pense tems under the ureau practce. In 1932 the cted
provson of the reguatons was restated n ts present form to
refect detas of admnstratve appcaton and practce of ong
standng. (T. D. 333, C. . I-1, 31 (1932).) The above-stated
restrcton on the opton as respects amounts pad contractors under
turnkey contracts was not wrtten nto the reguatons but the
anguage of the reguatons formng the bass for the stated ds-
tncton as to such payments was eft essentay unchanged, and the
prevousy estabshed restrcton on the opton contnued n force.
In the 1932 restatement, t was e pressy stated that Drng
and deveopment costs sha not be e cepted from the opton merey
because they are ncurred under a contract provdng for the dr-
ng of a we to an agreed depth, or depths, at an agreed prce per
foot or other unt of measurement. In the case of /. Rudman v.
Commssoner (36 . T. ., 803), acquescence on ths pont, C. .
1938-1, 26), the oard apparenty regarded the quoted anguage as
permttng amounts pad to a contractor under a footage contract
to be treated as deductbe e penses under the opton; provded the
contract s not a turnkey contract as defned by the oard dec-
sons. That decson aso makes t cear that a contract s no ess
a footage contract because t rected a tota stpuated ump sum
consderaton for drng to a depth of 2,950 feet nstead of an
agreed prce per foot.
There remans for dscusson the status of payments under con-
tracts whch are nether turnkey nor footage contracts as
those terms are defned above whch was the queston presented to
and decded n the recent cases of Retsa Drng Co. v. Commssoner
( 2 . T. ., 1057, acquescence, C. . 19 1-1, 9) (appea pendng
C. C. . 5) and W. D. mbrose v. Commssoner ( 2 . T. ., 1 05,
nonacquescence, C. . 19 1-1, 12) (appea pendng C. C. . 5).
Under the contracts nvoved n the Retsa case, the contractors dd
not agree to furnsh a matera and abor needed. Under one con-
tract the operator agreed to furnsh fue, water, storage tanks, and
connectons. In the other contract the operator agreed to furnsh
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77
19.23(m)-16.
u water, fue, tanks, fow nes and a man to supervse the drng
of the sand area and the runnng of the casng, and aso to swab n
the wes. The oard hed such contracts were not turnkey
contracts. The oard aso ponted out that the fact that the pro-
ducng sands n the fed coud be estmated wthn a few feet, to-
gether wth the contractua provson that the wes were to be
dred to the Woodbne sand found at 3,600 -3,650 , was not the
equvaent of the stpuaton n the contract n the Rudman case
to dr to a depth of 2,950 feet, so as to quafy the contracts
theren as footage contracts under the Rudman case.
The amounts pad to the contractors n the Retsa case were hed
not to be ntangbe drng and deveopment costs, the oard sayng:
the contracts here were not contracts for the empoyment of abor
and the purchase of suppes, matera, and equpment. The reatonshp be-
tween the partes was not that of empoyer and empoyee, but that of Inde-
pendent contractors. The pettoner dd not hre abor or buy materas and
suppes, but agreed to pay an Independent contractor a stated sum for a
fnshed |ob, eavng It to the contractor to make hs own dea for abor and
equpment, and the fact that the pettoner may have furnshed some of the
suppes and some tems of equpment does not change the contracts so as to
brng any porton of the amounts pad to the contractors wthn the provsons
of artce 23(m)-16.
It thus appears that amounts pad to ndependent contractors under
contracts whch are nether turnkey nor footage contracts are
not wthn the opton to e pense ntangbe drng costs.
Such rue s confrmed by the oard s decson n mbrose v. Com-
mssoner, supra. In that case the contracts were cost-pus con-
tracts. The oard dstngushed that case from the Retsa case by
stressng features of the contract whch t beeved estabshed the
empoyer-empoyee reatonshp between the operator and the drer,
and concuded that payments made by the operator were drect e -
pendtures of the operator for ntangbe drng and deveopment
costs under the pertnent reguaton. Such decsons show that n
the opnon of the oard payments made to ah ndependent contrac-
tor under a contract whch s nether a turnkey nor footage
contract, as those terms are defned above, are not wthn the opton,
whe payments to an empoyee or agent of the operator are wthn
the opton.
It shoud be noted that some of the so-caed payments nvoved
n the above-cted cases were n-o payments. Such n-o payments
are not payments by the operator. The operator n such cases does
not personay owe or pay the contractor anythng. Such n-o
payments are n reaty the drer s share of producton ncome ars-
ng from o payment rghts acqured by the drer by reason of hs
nvestment (consstng of the amounts e pended by hm n drng
and competng the we) n an economc nterest n o and gas n
pace. s the operator does not pay the drer anythng there s
no payment by hm representng ether e pense or capta e pend-
ture to hm. (See G. C M. 22730, C. . 19 1-1, 21 .)
Summarzng the above dscusson, t s the opnon of ths offce
that under the controng cases:
(1) Payments to a contractor under a turnkey contract as
defned by the cases cted as controng are capta e pendtures,
though the contract may be aso a footage contract as defned
above.
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19.23(m)-16.
78
(2) Costs ncurred by operators under a footage contract, whch
s not aso a turnkey contract, represent ntangbe drng and
deveopment costs whch may be charged to e pense under the opton.
(3) Payments to a contractor under a contract that s nether a
turnkey nor a footage contract are capta e pendtures f the
contractor s an ndependent contractor; but may be charged to
e pense under the opton f the contractor s an empoyee or agent
of the operator rather than an ndependent contractor.
( ) ntangbe drng and deveopment cost ncurred n dr-
ng and deveopment carred on by operators through empoyees or
agents are wthn the opton.
. P. Wenchb,
Chef Counse, ureau of Interna Revenue.
Secton 19.23(m)-16: Charges to capta and 19 2-22-11109
to e pense n the case of o and gas wes. G. C. M. 232 3
INT RN L R NU COD ND R NU CTS OF 1932, 193 , 1930. ND 1938.
Intangbe drng and deveopment costs Incurred by o and gas
operators may be deducted as busness e penses under the opton
granted by secton 19.23(m)-16(a) of Reguatons 103 and cor-
respondng provsons of pror reguatons Irrespectve of the ega
reatonshp between the ta payer and the drer, 1. e., whether the
drer s an Independent contractor or an empoyee.
G. C. M. 2303 page 75, ths uetn revoked.
In G. C. M. 2303 page 75, ths uetn , whch was based upon the
decsons of the oard of Ta ppeas n W. D. mbrose et a. v.
Commssoner ( 2 . T. ., 1 05) and Retsa Drng Co. v. Com-
mssoner ( 2 . T. ., 1057), t was hed that the opton granted by
secton 19.23(m)-16(a) of Reguatons 103 to charge to e pense
ntangbe drng and deveopment costs ncurred by o and gas
operators ncudes amounts pad to an ndependent contractor for the
drng of a we under a footage contract, uness such contract s
a turnkey contract; and that payments to a contractor under a
contract that s nether a turnkey nor a footage contract are capta
e pendtures f the contractor s an ndependent contractor, but may
be charged to e pense under the opton f the contractor s an empoyee
or agent of the operator rather than an ndependent contractor.
The Crcut Court of ppeas for the Ffth Crcut n the recent cases
of Commssoner v. W. D. mbrose et a. (decded pr 8, 19 2).
Retsa Drng Co. v. Commssoner (decded pr 17, 19 2), and
. C. Laster et a. v. Commssoner (decded pr 17, 19 2) hed,
contrary to the concuson e pressed n G. C. M. 2303 , supra, that
payments representng ntangbe drng and deveopment costs made
by operators of o and gas propertes under contracts whch were not
true turnkev contracts were wthn the opton provded n artce
23(m)-16 of Reguatons 86 and thus deductbe as busness e penses,
rrespectve of the ega reatonshp between the ta payer and the
drer, . e., whether the drer s an ndependent contractor or an
empoyee.
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79
19.23(o)-.
Inasmuch as the resuts of the cted court decsons are n accord
wth the generay recognzed ureau practce prevang pror to the
cted oard decsons, G. C. M. 2303 , supra, s hereby revoked.
M. . Lemng,
ctng Chef Counse, ureau of Interna Revenue.
S CTION 23(o). D DUCTIONS FROM GROSS INCOM :
C RIT L ND OT R CONTRI UTIONS.
Secton 19.23(o)-: Contrbutons or gfts 19 2-20-11096
by ndvduas. I. T. 35 9
INT RN L R NU COD .
commttee n charge of a fund consstng of ndvdua contr-
butons whch are to be used for the purpose of defrayng the
traveng and hosptazaton e penses of, and to provde support
for, a specfc ndvdua whe he recovers from a serous Iness s
not such an organzaton as s contempated by secton 23(0)2 of
the Interna Revenue Code, as amended, and contrbutons to the
fund are not deductbe n the ndvdua ncome ta returns of the
donors.
dvce s requested whether contrbutons to a fund descrbed
herenafter are deductbe n the Federa ncome ta returns of the
donors for the year 19 1.
It s stated that , formery an empoyee of the M Corporaton,
became serousy and t was necessary for hm to take e tended
eave wthout pay. fter he had been n a santarum for a perod
of two years, the physcans decded that he coud not recover -uness
removed to a hgher and drer cmate. Snce coud not meet the
e penses, hs frends n the M Corporaton organzed the fund,
desgnatng three ndvduas as trustees thereof, and the Fund
Commttee was formed. The money coected by the commttee n
the form of contrbutons to the fund n 19 1 was deposted wth a
bank n trust, the bank beng advsed to dsburse such money n
accordance wth wrtten nstructons from the trustees for the pur-
pose of defrayng s traveng and hosptazaton e penses.
In order that a contrbuton may be deducted n the Federa ncome
ta return of an ndvdua donor, payment must be made wthn the
ta abe year to or for the use of an organzaton of the character
specfed n secton 23(o) of the Interna Revenue Code, as amended
by secton 22 (a) of the Revenue ct of 1939. Secton 23(o)2 of the
Code, as so amended, authorzes (n the case of an ndvdua) the
deducton of contrbutons or gfts made to or for the use of:
corporaton, trust, or communty chest, fund, or foundaton, created or
organzed n the Unted States or n any possesson thereof or under the aw
of the Unted States or of any State or Terrtory or of any possesson of the
Unted States, organzed and operated e cusvey for regous, chartabe,
scentfc, terary, or educatona purposes, or for the preventon of cruety to
chdren or anmas, no part of the net earnngs of whch nures to the beneft
of any prvate sharehoder or Indvdua, and no substanta part of the
actvtes of whch Is carryng on propaganda, or otherwse attemptng, to
nfuence egsaton;
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5 19.23(q)-.
80
The tota deducton authorzed by secton 23 (o), supra, may not
e ceed 15 per cent of the ta payer s net ncome as computed wthout
the beneft of such secton.
Whether contrbutons to the fund consttute aowabe deduc-
tons n the ncome ta returns of the ndvdua donors depends
upon whether such contrbutons are to be used e cusvey for
chartabe purposes wthn the meanng of secton 23 (o)2 of the
Interna Revenue Code, as amended. It s apparent that the con-
trbutons were made to the fund for the support of whe he s
recoverng from hs ness and that the money so contrbuted can
not propery be used for any other purpose.
In Cap ndrew Tes v. Commssoner (38 . T. ., 5 5) the
oard of Ta ppeas consdered a camed deducton representng
a contrbuton to a fund beng rased to provde a musca educaton
for a young gr who dd not have suffcent means of her own to
obtan such an educaton. The oard hed that the amount con-
trbuted was not a ega deducton from gross ncome under secton
23 (n) of the Revenue ct of 1932, whch corresponds to secton 23 (o)
of the Interna Revenue Code, as amended, and sad n ts opnon:
We do not thnk that t was the ntenton of Congress to aow
the deducton from gross ncome of a chartabe gft whch was for the beneft
of ony one person.
Other decsons ndcate that the term chartabe purposes, as
used n secton 23(o)2 of the Interna Revenue Code, as amended,
and n correspondng provsons of pror revenue aws, has reference
to pubc rather than prvate chartes and that a contrbuton
to a fund s not deductbe n the Federa ncome ta return of a
donor where specfc ndvduas are desgnated as benefcares.
(See ames Sprunt enevoent Trust v. Commssoner, 20 . T. .,
19, and enry C. Du os v. Commssoner, 31 . T. ., 239.)
In vew of the foregong, t s hed that the Fund Commttee s
not such an organzaton as s contempated by secton 23 (o) 2 of
the Interna Revenue Code; as amended, and contrbutons to the
fund are not deductbe n the ndvdua ncome ta returns of
the donors.
Secton 19.23(o)-: Contrbutons or gfts by ndvduas.
INT RN L R NU COD .
Contrbutons to the Navy Reef Socety. (See I. T. 3550,
page 10 .)
S CTION 23(q). D DUCTIONS FROM GROSS INCOM :
C RIT L ND OT R CONTRI UTIONS
Y CORPOR TIONS.
Secton 19.23 (q)-: Contrbutons or gfts by corporatons.
INT RN L R NU COD .
Contrbutons to the Navy Reef Socety. (See I. T. 3550,
page 10 .)
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81
19.25- .
S CTION 25. CR DITS OF INDI IDU L
G INST N T INCOM .
Secton 19.25- : Persona e empton of head 19 2-9-11003
of famy. Mm. 5327
( so Secton 25, Secton 19.25-6.)
Rues governng the aowance of persona e empton as the head
of a famy, and credt for dependents.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, February 9, 191 .
Coectors of Interna Revenue, Interna Revenue gents n Charge,
eads of Fed Dvsons of the Technca Staff, and Other Offcers
and mpoyees of the ureau of Interna Revenue Concerned:
ead or a Famy.
1. Secton 25(b) of the Interna Revenue Code provdes for a per-
sona e empton of 1,500 for the head of a famy wthout defnng the
term. smar e empton has been provded for n a pror ncome
ta cts aso wthout defnng such term.
2. The reguatons promugated under the Code and the pror
Revenue cts have defned the term as:
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 marrage, 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.
3. The above-quoted defnton of the head of a famy sets forth the
foowng tests whch must be met by a camant for that status:
(a) The camant must actuay support and mantan one or more
dependent ndvduas.
(b) The support and mantenance must be n one househod.
(c) The dependents must be cosey connected wth the camant by
bood reatonshp, reatonshp by marrage, or by adopton.
(d) The camant s rght to e ercse famy contro and provde for
the dependents must be based upon some mora or ega obgaton.
D P ND NTS ND CTU L SUPPO T.
. dependent ndvdua, wthn the meanng of 3(a), above, may
be more than 18 years of age and need not necessary be ncapabe of
sef-support because of menta or physca defects, as s requred n the
case of a dependent for whom the credt of 00 s aowabe. It s
requred that the dependent must n fact be fnancay dependent upon
hs benefactor for support and mantenance and must receve from such
benefactor more than one-haf of the tota sum necessary for that pur-
pose. The amount necessary for support of the dependent s mportant
ony n those nstances where the entre support s not supped by the
camant for the head of a famy status and s then to be determned
upon the bass of the facts present n the ndvdua case. n nd-
vdua s not n fact dependent f he has an ncome adequate for hs
support even though such ncome w not permt the contnuance of a
stye of vng to whch the ndvdua has been accustomed.
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19.25- .
62
ON OUS OLD.
5. The second test, set forth n paragraph 3( ), above, fnds amp-
fcaton n the reguatons (secton 19.25- , Reguatons 103), where t
s provded that the e empton w appy ( ) f the father s absent
on busness, or a chd or other dependent s awav at schoo or on a
vst, the common home beng st mantaned, or ( ) f, through force
of crcumstances, a parent s obged to mantan hs dependent chdren
wth reatves or n a boardng house whe he ves esewhere; but the
e empton w not appy, rrespectve of the queston of support, f,
wthout necessty, the dependent contnuousy makes hs home apart
from hs benefactor, or n the case of a resdent aen wth chdren
abroad. though the above e ampes refer to the father, and a
parent, the crcumstances there cted woud be equay appcabe to
any other ndvdua who s a head of a famy. For e ampe, a
dvorced father, forced to ve apart from hs famy, but furnshng
ther entre support and havng substanta rghts of famy contro
whch he e ercses, meets the one househod test wthn the meanng
of the reguatons. Ths s true of an ndvdua furnshng n the
famy homestead the entre support of dependent reatves when he,
hmsef, because of hs professon, s forced to resde n a dfferent
ocaty. So, too, n the case of a dependent whose menta or phvsca
condton requres attenton and/or treatment whch precudes vng
n one househod.
D GR OF R L TIONS IP R UIR D.
6. The thrd test, stated n paragraph 3(c), above, requres a cose
connecton wth the camant by bood, marrage, or adopton. For
ths purpose, cose connecton by bood e tends to the parents, grand-
parents, and other progentors n the drect ne, nea descendants,
brothers and ssters of the whoe or haf bood, unces, aunts, nephews,
and neces. Frst cousns by bood and cousns of esser degree are
not cosey connected by bood reatonshp.
cose connecton by marrage e tends to stepchdren, stepssters,
stepbrothers, father and mother n aw, and brothers and ssters n
aw. Other degrees of reatonshp by marrage are consdered too
remote to quafy.
dopton through ega proceedngs accordng to the aw of the
|ursdcton s requred n order to meet the test of reatonshp by
adopton. ega guardan does not, soev by reason of such rea-
tonshp, quafy as cosey connected wthn the meanng of the
reguatons.
RIG T TO RCIS F MILY CONTROL ND O LIG TION TO SUI PORT.
7. The rght to e ercse famy contro s generay the rght to
determne the manner n whch the affars of the househod sha be
conducted and ths rght fas naturay to hm who furnshes the
means for ts support and mantenance. In the case of a dvorce
where the support s supped by reason of a court order wthout
conferrng any substanta rght of contro over the dependents, the
test s not met. If, however, n the case of a dvorce, the husband
suppyng the soe means of support pursuant to the decree, s granted
n the decree, and e ercses, a substanta degree of contro, he meets
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83
19.25- .
the prescrbed test even though hs rght of contro s not e cusve.
Occasonay t may happen that the one who furnshes the ma|or
porton, but not a, of the means of support w fa to meet the test
of havng the rght to e ercse famy contro. Such nstances w
most commony arse where a son or a daughter contrbutes to house-
hod funds a sum n e cess of that contrbuted by the natura head of
the famy, but does not n fact thereby secure the rght to contro.
ach such case must be decded upon the partcuar facts.
The test of whether there s a ega obgaton to support another
s reatvey smpe. mora obgaton for ncome ta purposes s
recognzed ony to the e tent of support of ndvduas specfed n
paragraph 6 above.
Cmdt for Dependents.
8. Secton 25(b)2 of the Interna Revenue Code, pror to ts amend-
ment by secton 113 of the Revenue ct of 19 1, provded a credt of
00 for each person (other than husband or wfe) dependent upon
and recevng hs chef support from the ta payer f such dependent
person s under 18 years of age or s ncapabe of sef-support because
mentay or physcay defectve. The amendment referred to em-
nated the credt for one de| Mdent f the ta payer woud not occupy
the status of head of a famy e cept by reason of such dependent(s).
The effect of the amendment s to equaze the amount of the credts
aowabe under practcay dentca crcumstances to a marred nd-
vdua and the head of a famv.
9. Secton 19.25-6 of Reguatons 103 estabshes the foowng
tests whch must be met by a ta payer seekng a credt for a depend-
ent (on account of the provsons of secton 21 of the Code, non-
resdent aens not resdents of ether Canada or Me co can not
under any crcumstances quafy for the credt) :
(a) The person to whom the support s furnshed must be dependent
upon the ta payer.
(b) The ta payer must furnsh the chef support of the person
camed as a dependent.
(c) The dependent person must be under 18 years of age or n-
capabe of sef-support because mentay or physcay defectve.
D P ND NCY.
10. The degree of dependency whch must be shown to e st n order
to be entted to the 00 credt s dentca wth that set forth n para-
graph of ths mmeograph. The dependency must be actua fnan-
ca dependency and not mere ega dependency unaccompaned by
actua support. chd under 18 wth separate ncome from a trust n
an amount suffcent for hs support, but not requred by the terms of
the nstrument to be apped for that purpose, s a dependent of hs
parent for ncome ta purposes f that parent s egay abe for and
actuay furnshes the support of the chd. mnor under 18 years
of age wth separate earnngs suffcent for hs support, n the absence
of emancpaton, may entte hs parent to a dependency credt under
the genera rues appcabe to dependents. In such a case the mnor s
earnngs must be ncuded n the parent s return. Whether or not the
mnor nas been emancpated depends upon the aw of the State as
apped to the facts n each case.
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19. 1-1.
8
C I F 8UITORT.
11. To furnsh the chef support of ; dependent means to furnsh
more than one-haf of the sum requred for that purpose. Ths test s
essentay the same as the one to be met n quafyng as head of a
famy whch s dscussed n paragraph of ths mmeograph.
M NT L OR P YSIC L D FICI NCY.
12. The menta or physca defect renderng a dependent ncapabe
of sef-support need not be a permanent affcton. The credt, or a
prorated part thereof, s aowabe wth respect to ndvduas who by
reason of temporary mpared heath are ncapabe of sef-support
provded the other necessary quafcatons e st. Od age aone may
consttute a suffcent menta or physca defect.
G N R L.
13. The statements contaned n ths mmeograph represent the pres-
ent atttude of the ureau. In the appcaton of the provsons of
ths mmeograph to specfc cases, any subsequent rungs of the
ureau, or any subsequent decsons of the oard of Ta ppeas or
the courts whch have been accepted by the ureau and are contrary
to the provsons of ths mmeograph, shoud be taken nto consd-
eraton.
Norman D. Cann,
ctng Commssoner.
Secton 19.25-6: Credt for dependents.
INT RN L R NU COD .
Rues governng aowance of credt. (See Mm. 5327, page 81.)
P RT I . CCOUNTING P RIODS ND M T ODS OF CCOUNTING.
S CTION 1. G N R L RITL .
Secton 19. 1-1: Computaton of net ncome. 19 2-1-109 8
( so Secton 23(c), Secton 19.23(c)-; Mm. 5297
Secton 131, Secton 19.131-1.)
rtsh bocked accounts as reated to ncome from rtsh
sources to be reported on ncome ta returns fed wth the Unted
States; to payment of rtsh ta es wth respect to any ncome
ncuded n such accounts; and to vauaton of rtsh current assets
at the begnnng and end of the ta abe year for purposes of deter-
mnng ncome from the rtsh branch of a domestc ta payer s
busness.
Rates of converson of rtsh pounds sterng to Unted States
doars appcabe to ncome of varous casses from Great rtan
reazabe from rtsh accounts other than the above.
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85
f 19. 1-1.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, December 16,19 1.
Coectors of Interna Revenue, Interna Revenue gents n Charge,
and Other Persons Concerned:
The e stng system of so-caed bocked accounts and reated
accounts mantaned by the Unted ngdom ncdent to the contro
by that Government of foregn e change and foregn trade trans-
actons presents from the standpont of Federa ncome ta aton two
probems:
(a) The amount of gross ncome from sources wthn the Unted
ngdom to be reported on Federa ncome and e cess profts ta
returns; and
(b) The foregn e change rates to be apped under the present
methods of rtsh governmenta e change contro n the converson
to Unted States dc ars of ncome from such sources recevabe n
rtsh pounds sterng and ncudbe n such returns.
The rates of e change, n turn, affect deductons from gross n-
come under secton 23(c) of the Interna Revenue Code, credts aganst
Unted States ncome ta under secton 131, Interna Revenue Code,
for rtsh ncome ta es, and converson rates of current assets as
shown by the books of account of rtsh brandes of a domestc
ta payer s busness, the vauaton of whch at the begnnng and end
of the year s a factor n te determnaton of ncome from rtsh
sources. The questons presented affect ctzens of the Unted States
resdent ether n the Unted States or n other countres (ncudng
the Unted ngdom), aen resdents of the Unted States, domestc
partnershps, trusts, and corporatons, and foregn corporatons op-
eratng n the Unted States and camng deductons for rtsh
ta es aocabe to ther ncome from sources wthn the Unted States.
The requrement of the rtsh Treasury that bocked accounts
be opened by certan authorzed banks n Great rtan under Regu-
aton 3 of Defense (Fnance) Reguatons 1939. as amended, be-
came effectve November 23, 19 0 (under Notce from the ank
of ngand). The tems whch may be credted ony to bocked
accounts n Great rtan coverng payments to a nonresdent of
that country are:
(a) Sterng proceeds of securtes drawn for repayment or ma-
turng after the date of Notce from the ank of ngand, or
surrendered after the date thereof for cashng before maturty. Ths
does not appy to Natona savngs certfcates, 3 per cent defense
bonds, or Treasury bs ssued by the rtsh Government.
(b) mounts to be dstrbuted foowng the sae or wndng up
of companes or the dssouton of partnershps.
(c) Legaces and smar payments.
a) Capta payments arsng out of settements.
(e) Proceeds of the sae of rea estate, furnture, pctures, |ewery,
or other movabe assets stuated n the Unted ngdom other than
goods mported for sae n the ordnary course of trade.
The ony way, e cept by speca permsson of the ank of ng-
and, that a nonresdent of the Unted ngdom may reaze on the
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I 19. 1-1.1
86
bocked account n whch sums to hs credt are frozen, s by
converson wth permsson nto specfed governmenta securtes
from whch such nonresdent may receve nterest n sterng whch,
as ncome, s avaabe to hm through regstered account at the
offca e change rate estabshed by the rtsh Treasury. The
offca rate woud aso appy to converson of rtsh ncome ta
pad wth respect to ths tem. ny ncome such as capta gans
otherwse frozen nto any of the capta tems covered by subdvsons
(a), (b), (c), (d), and (e), above, pad nto the bocked account
s not reazabe n any amount and, therefore, not ncudbe n gross
ncome for Federa ncome ta purposes. cept as noted above,
therefore, bocked accounts do not nfuence the amount of rtsh
ncome nor the e change rate at whch such ncome s brought nto
a domestc return, the rate of converson of rtsh ta es, or the
converson of rtsh current assets n the determnaton of ncome.
Income from rtsh sources of varous knds (e cusve of capta
gans), such as saares, pensons, commssons, professona fees, n-
terest on mortgages and securtes, rents, dvdends, patent and copy-
rght royates, trade-mark fees, and profts on commerca transac-
tons receved by a ta payer (whether resdng n Great rtan or
esewhere), f payabe n sterng, whe not wthn the scope of the
bocked account aready dscussed, w be converted to doars at
the offca rate of e change quoted by the ank of ngand as
of the date the payments were made or, n the case of a ta payer on
the accrua bass, then as of December 31 of the ta abe year. Ths
rate s the ony reazabe e change rate for converson of pounds
nto, doars, or vce versa, as a resut of the fact that any payments
n sterng or equvaent doars are reeased under reguatons of
the rtsh Treasury ony through controed accounts wth banks
or other prescrbed nsttutons or frms set up as Speca accounts,
egstered accounts, or Sterng area accounts, whch do not
permt payments to eave the country at other than the offca
rate.
The ob|ectve of the rtsh Government n settng up these
accounts, namey, to nsure that n so far as possbe the trade of
Great rtan be conducted on the bass of offca rates of
e change quoted by the ank of ngand| has been so far reazed
that there s tte free sterng e change now avaabe and there
s very tte dfference between the controed offca e change
rate and the free e change rate on sterng st avaabe on open
market. For reasons smar to those stated above, the rates of
e change, both for converson of rtsh current assets at the begn-
nng and end of the ta abe year and for converson of rtsh ta es
pad wth respect to the ncome nvoved, ether for foregn ta
credt purposes or deducton from gross ncome n the ta payer s
Unted States return, shoud be taken at the offca rate.
The above nstructons are not ntended to be apped to cases
where actua reazaton of the rtsh ncome, or effectuaton of the
payment of rtsh ta es, can be shown to have been accompshed at
rates dfferent from the rtsh offca rate.
These nstructons are based on the e stng stuaton n regard to
e change and fnance between the Unted States and Great rtan
and are sub|ect to modfcaton by events occurrng from tme to
tme.
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87
19. 1-1.
Correspondence regardng ths mmeograph shoud refer to the
number thereof and to the symbos IT: TM.
Gut T. everng,
Commssoner.
Secton 19. 1-1: Computaton of net ncome. 19 2-8-10997
( so Secton 111, Secton 19.111-1.) I. T. 3533
INT RN L R NU COD .
Method of reportng ncome to be empoyed by the M Company on
account of machnes eased to the N Company for use by t upon Gov-
ernment contracts where there Is an opton for the Government to pur-
chase the machnes and a recapture provson.
dvce s requested as to the proper treatment, for Federa ncome
ta purposes, of payments receved by the M Company from the N
Company under a ease contract coverng certan machnes to be used
n connecton wth Government contracts, where there s an opton for
the Government to purchase the machnes and a recapture provson.
Two machnes were eased by the M Company to the N Company
n connecton wth a Government contract hed by the atter com-
pany. These machnes cost appro matey 17a; doars each, and had
a vaue under the contract of 23a doars each. The contract pro-
vdes for a basc renta of 2.3a; doars per month consstng of a spe-
cfed number of hours. Provson s made for decreased payments
n case the machnes are n use for ony a part of a month, and for
ncreased payments n case of overtme use durng any month. Sec-
ton of the contract provdes:
When and f the tota renta pad to the essor for any pece of equpment
sha equa the vaue thereof, pus 1 per cent per month for each month or frac-
ton thereof such pece of equpment sha have been n use, no further renta
sha be pad to the essor and tte to the equpment sha vest n the Govern-
ment, the essor deverng to the Government free of any and a ens and
encumbrances tte to such pece of equpment. t the competon of the work
beng performed by the essee under the prncpa contract, or upon termna-
ton of the prncpa contract, as provded n artce of the prncpa con-
tract, the Government may at ts opton purchase any pece of equpment by
payng the essor the dfference between the vauaton of such pece of equp-
ment, pus 1 per cent per month for each month or part thereof such pece of
equpment sha have been In use and the tota renta therefor pad for such
pece of equpment, provded that f such payment Is made by the Government,
the essor sha dever to the Government, free of any and a ens and encum-
brances, tte to such pece of equpment.
On ths bass the vaue of each machne woud be fuy recovered
n 10 months provded the basc renta of 2.3a doars s receved
each month, and tte to the machne woud pass to the Government
upon recept of further rent n the amount of 1 per cent a month for
the tme the machne was n use. In case a machne s not n use
for suffcent tme for tte to pass through recept of rentas and the
Government e ercses ts opton to acqure tte, the baance of the
vaue of the machne not aready recovered, pus 1 per cent a month
for the tme the machne was n use, woud be receved as a snge
payment.
Upon the bass of the above, and under authorty of secton 1 of
the Interna Revenue Code reatng to accountng perods and meth-
ods of accountng, there may be reported as ncome n each ta abe
year that porton of a amounts receved under the contract whch
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19. - .
88
represents the percentage of proft n a such recepts, so ong as the
tota of such recepts does not e ceed 23a doars, the vaue of each
machne f ed n the contract. Ths shoud be computed as foows:
Doar:
Contract vaue 23
Cost 17
Proft on the transacton O
Percentage of proft to contract vaue. 20.08 per cent.
Payments for months at 2. doars were receved durng the ta abe year
19 1.
Payments receved ( 2.3 doars) 9.2
Proft for year (20.08 per cent of 9.2 doars) 2. #
ny amounts whch represent a f ed fee receved n e cess of the
contract vaue of each machne, 22 doars, shoud be reported as
100 per cent proft.
In the event the amounts receved do not equa the contract vaue
of the machnes and the Government fas to e ercse ts opton, and
the M Company repossesses the machnes, gan or oss shoud be com-
puted for the year n whch repossesson occurs. Such gan or oss s
to be measured by the dfference between the far market vaue of the
machnes repossessed and the bass n the hands of the M Company
of the unpad porton of the contract vaue (that s, the unrecovered
cost) wth proper ad|ustments for any other amounts reazed or
costs ncurred n connecton wth the repossesson. The far market
vaue of the machnes w be represented by ther cost ess a reason-
abe amount of deprecaton to the date of repossesson.
Ths accountng method of returnng ncome shoud be used n the
case of a contracts of the M Company of ths same character, but t
shoud not be used n the case of other contracts whch are substan-
tay dfferent.
S CTION 2. P RIOD IN W IC IT MS OF
GROSS INCOM INCLUD D.
Secton 19. 2 1: When ncuded n gross ncome.
INT RN L R NU COD .
Interest (on saary deductons) pad upon death of a cv servce
empoyee of the Unted States and saary of decedent for ta abe
perod pror to hs death. (See I. T. 3557, page 35.)
S CTION . INST LLM NT SIS.
Secton 19. - : Deferred-payment sae of 19 2-5-10981
rea property not on nstament pan. T. D. 5113
TITL 26 INT RN L R NU . C PT R L SU C PT R , P RTS 3, 9, ND
19. INCOM T .
mendng secton 19. - of Reguatons 103, artce - of
Reguatons 101, 9 , and 86, artce 35 of Reguatons 77 and 7 ,
and artce 0 of Reguatons 69 reatng to gan or oss upon re-
possesson of rea property upon defaut under deferred payment
sae not on the nstament pan, where tte had prevousy passed
to the purchaser.
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89
5 19. .
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
Paragraph 1. Secton 19. - of Reguatons 103 Part 19, Tte
26, Code of Federa Reguatons, 19 0 Sup. and artce - of
Reguatons 101 secton 9. - , Tte 26, Code of Federa Regua-
tons, 1939 Sup. are amended by strkng from the second paragraph
the ast four sentences and by nsertng n eu thereof the foowng:
If the vendor has prevousy transferred tte to the purchaser, and the pur-
chaser defauts n any of hs payments, and the vendor accepts a vountary
reconveyance of the property, n parta or fu satsfacton of the unpad
porton of the purchase prce, the recept of the property so reacqured, to
the e tent of ts far market vaue at that tme, ncudng the far market
vaue of f ed Improvements paced on the property by the purchaser, sha
be consdered as the recept of payment on the obgatons satsfed. If the far
market vaue of the property s greater than the bass of the obgatons of
the purchaser so satsfed (generay, such bass beng the far market vaue of
such obgatons prevousy recognzed In computng ncome), the e cess con-
sttutes ordnary ncome, and f the vaue of such property s ess than the
bass of such obgatons, the dfference may be deducted as a bad debt f
ascertaned to be worthess and charged off wthn the ta abe year, e cept
that f the obgatons satsfed are securtes (as defned n secton 23(k)(3)
and secton 117(f)), any gan or oss resutng from the transacton s a capta
gan or oss sub|ect to the provsons of secton 117. If the property reacqured
s subsequenty sod, the bass for determnng gan or oss s the far market
vaue of the property at the date of reacquston ncudng the far market vaue
of the f ed mprovements paced on the property by the purchaser. See secton
19.23(k)-3 artce 23(k)-3 of Reguatons 101 wth respect to property re-
acqured n a forecosure proceedng.
Par. 2. rtces - of Reguatons 9 secton 8. - , Tte 26,
Code of Federa Reguatons and of Reguatons 86 are amended by
strkng from the second paragraph the ast four sentences and by
nsertng n eu thereof the foowng:
If the vendor has prevousy transferred tte to the purchaser, and the pur-
chaser defauts n any of hs payments, and the vendor accepts a vountary
reconveyance of the property, n parta or fu satsfacton of the unpad por-
ton of the purchase prce, the recept of the property so reacqured, to the
e tent of ts far market vaue at that tme, ncudng the far market vaue
of f ed mprovements paced on the property by the purchaser, sha be con-
sdered as the recept of payment on the obgatons satsfed. If the far
market vaue of the property s greater than the bass of the obgatons of
the purchaser so satsfed (generay, such bass beng the far market vaue
of such obgatons prevousy recognzed n computng ncome), the e cess
consttutes ordnary ncome, and f the vaue of suc property Is ess than the
bass of such obgatons, the dfference may be deducted as a bad debt f
ascertaned to be worthess and charged off wthn the ta abe year, e cept
that f the obgatons satsfed are of the cass specfed n secton 117(f),
any gan or oss resutng from the transacton s a capta gan or oss sub|ect
to the provsons of secton 117. If the property reacqured s subsequenty
od, the bass for determnng gan or oss s the far market vaue of the
property at the date of reacquston ncudng the far market vaue of the
f ed mprovements paced on the property by the purchaser. See artce
23(k)-3 wth respect to property reacqured n a forecosure proceedng.
Par. 3. rtce 35 of Reguatons 77 and of 7 and artce 6 of
Reguatons 69 are amended by strkng from the second paragraph
the ast four sentences and nsertng n eu thereof the foowng:
If the vendor has prevousy transferred tte to the purchaser, and the pur-
chaser defauts In any of hs payments, and the vendor accepts a vountary
7 018
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19.51- .
90
reconveyance of the property, In parta or fu satsfacton of the unpad porton
of the purchase prce, the recept of the property so reacqured, to the e tent
of ts far market vaue at that tme, ncudng the far market vaue of
f ed Improvements paced on the property by the purchaser, sha be con-
sdered as the recept of payment on the obgatons satsfed. If the far
market vaue of the property s greater than the bass of te obgatons of
the purchaser so satsfed (generay, such bass beng the far market vaue
of such obgatons prevousy recognzed n computng Income), the e cess con-
sttutes ordnary ncome, and f the vaue of such property s ess than the
bass of such obgatons, the dfference may be deducted as a bad debt f
ascertaned to be worthess and charged off wthn the ta abe year. If the
property reacqured s subsequenty sod, the bass for determnng gan or
oss s the far market vaue of the property at the date of reacquston In-
cudng the far market vaue of the f ed mprovements paced on the property
by the purchaser. See artce 193 153 of Reguatons 69 wth respect to
property reacqured n a forecosure proceedng.
(Ths Treasury decson s ssued under the authorty contaned
n secton 62 of the Interna Revenue Code (53 Stat., 32, 26 U. S. C,
Sup. , 62), secton 62 of the Revenue cts of 1938, 1936, 193 , 1932,
and 1928 (52 Stat., 80. 26 U. S. C, Sup. I , 62; 9 Stat., 1673,
26 U. S. C, Sup. II, 62; 8 Stat., 700, 26 U. S. C, 62; 7 Stat., 191;
5 Stat., 810), and secton 1101 of the Revenue ct of 1926 ( Stat.,
111).)
Norman D. Cann,
ctng Commssoner of Interna Revenue.
pproved anuary 26, 19 2.
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster anuary 28, 19 2, 11 a. m.)
P RT . R TURNS ND P YM NT OF T .
S CTION 51. INDI IDU L R TURNS.
Secton 19.51- : erfcaton of returns. 19 2-1 -110 7
I. T. 35 6
INT RN L R NU COD .
Income ta returns of cvan empoyees at rmy and Navy bases
beyond the contnenta mts of the Unted States may not be sworn
o before rmy offcers or offcas of the War Department. owever,
such returns may be sworn to before certan desgnated offcers of the
Navy or Marne Corps n accordance wth the authorzaton of the
Secretary of the Navy under authorty of artce 69 of the rtces
for the Government of the Navy (Tte 3 , U. S. C. ., secton 1200).
mercan ctzens resdng n regons of Newfoundand, where t s
mpractcabe or fnancay burdensome to have the oath on ther
returns admnstered by a consu or an authorzed offcer of the Navy
or Marne Corps, may have ther sgnatures wtnessed by two persons
n accordance wth the procedure adopted wth regard to appcatons
for passports and regstratons.
dvce s requested as to the authorty of offcas of the War or
Navy Department or offcers of the rmy or Navy to admnster the
oaths requred on Federa ncome ta returns fed by cvans resd-
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19.51- .
ng at mtary bases n Newfoundand. ttenton s caed to the
fact that many of such cvans are statoned consderabe dstances
from the Unted States consuate and the makng of the oath n the
prescrbed manner s frequenty mpractcabe or fnancay burden-
some.
Secton 19.51- of Reguatons 103 provdes n part :
T|e oath or affrmaton may be admnstered by any person duy
authorzed to admnster oaths for genera purpows by the aw of the Unted
States or of any State, Terrtory, or possesson of the Unted States, or of the
Dstrct of Coumba, wheren such oath or affrmaton s admnstered, or by
a consuar offcer of the Unted States. Persons n the nave or mtary servce
of the Unted States may verfy ther returns before any ofh u authorzed to
admnster oaths for the purposes of those respectve servces.
Tte 10, U. S. C. ., secton 1586 (artce 11 , rtces of War), pro-
vdes:
ny udge advocate or actng |udge advocate, the presdent of a genera or spe-
ca court-marta, any summary court-marta, the tra |udge advocate or any
assstant tra |udge advocate of a genera or speca court-marta the presdent
or the recorder of a court of nqury, or of a mtary board, any offcer desgnated
to tak. a deposton, any offcer detaed to conduct an Investgaton, and the
ad|utant of any command sha have power to admnster oaths for the purposes
of the admnstraton of mtary ustce and for other purposes of mtary
admnstraton; and In foregn paces where the rmy may 1 servng sha have
the genera powers of a notary pubc or of a consu of the Unted States In the
admnstraton of oaths, the e ecuton and acknowedgment of ega Instruments,
the attestaton of documents, and a other forms of notara acts to be e ecuted
by persons sub|ect to mtary aw. ( une , 1920, ch. 227, Subchapter II, secton
1, 1 Stat., 810.)
It s apparent that the above-quoted statute does not vest any off-
ca of the rmy or of the War Department wth authorty to admns-
ter oaths for genera purposes wthn the meanng of secton 19.51- of
Reguatons 103, supra. Moreover, t has been hed that the phrase
persons n the nava or mtary servce of the Unted States, as used
n the reguatons, means ony the commssoned, noncommssoned,
and ensted personne of the mtary servce, and, therefore, does not
ncude cvan empoyees of the rmy and Navy estabshments. It
foows that rmy offcers may not admnster the oaths n queston.
The statutory authorty of offcas of the Navy, however, s broader
than that of offcas of the rmy or War Department. The ct of
pr 25, 1935, Pubc, No. 8 ( 9 Stat., 161), provdes:
That n paces beyond the contnenta mts of the Unted States where the
Navy or Marne Corps s servng, such offcers of the Navy or Marne Corps
as are authorzed to admnster oaths for the purposes of the admnstraton o
nava ustce and for other purposes of nava admnstraton sha have the
genera powers of a notary pubc or of a consu of the Unted States n the
admnstraton of oaths, the e ecuton and acknowedgment of ega Instruments,
the attestaton of documents, and the performance of a other notara acts.
Under authorty of artce 69 of the rtces for the Government of
the Navy (Tte 3 , U. S. C. ., secton 1200), the Secretary of the
Navy has authorzed n offcers of the Navy and Marne Corps on
actve duty, ncudng retred and reserve offcers, of the ranks of
eutenant (|unor grade) and frst eutenant and above, to admnster
oaths for purposes of nava admnstraton.
It s the opnon of ths offce that, under the provsons of the ct
of pr 25,1935, supra, n paces beyond the contnenta mts of the
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19.51- .
92
Unted States offcers of the Navy and Marne Corps of the ranks
desgnated by the Secretary of the Navy (as above stated) are persons
duy authorzed to admnster oaths for genera purposes wthn the
meanng of secton 19.51 of Reguatons 103, supra.
The ureau has hed that when e ecutng ther ncome ta returns
mercan ctzens n foregn countres may f the servces of a notary
are not avaabe, have ther sgnatures wtnessed by two persons n
accordance wth the procedure adopted wth regard to appcatons for
passports and regstratons, secton 171, Consuar Reguatons, note 1.
(See O. D. 189, C. . 1, 190 (1919), and I. T. 3213, C. . 1938-2, 72.)
The same procedure shoud therefore be foowed n the case of mer-
can ctzens n regons of Newfoundand where t s mpractcabe or
fnancay burdensome to have ther ncome ta returns sworn to
before a consu or an authorzed offcer of the Navy or Marne Corps.
Secton 19.51- : erfcaton of returns. 19 2-2 -11123
I. T. 3558
INT RN L R NU COD .
Income ta returns of cvan empoyees at rmy and Navy
bases beyond the contnenta mts of the Unted States who are
sub|ect to mtary aw under artce 2, rtces of War (10 U. S.
C. ., secton 1 73(d)), may be sworn to before rmy offcers or
offcas of the War Department cothed wth the genera powers of
a notary pubc or of a consu of the Unted States n the admns-
traton of oaths to persons sub|ect to mtary aw under artce
11 , rtces of War (10 U. S. C. ., secton 1586).
I. T. 35 6 page 90, ths uetn modfed.
Reconsderaton has been gven I. T. 35 6 page 90, ths uetn n
so far as t hods that Federa ncome ta returns of cvan em-
poyees at rmy and Navy bases beyond the contnenta mts of
the Unted States may not be sworn to before rmy offcers or
offcas of the War Department.
rtce 11 , rtces of War ( ct une , 1920, 1 Stat., 810; 10
U. S. C. ., secton 1586), provdes that certan desgnated offcers
sha have power to admnster oaths for the purposes of admnstra-
ton of mtary |ustce and for other purposes of mtary admnstra-
ton, and n foregn paces where the rmy may be servng sha
have the genera powers of a notary pubc or of a consu of the
Unted States n the admnstraton of oaths, the e ecuton and ac-
knowedgment of ega nstruments, the attestaton of documents, and
a other forms of notara acts to be e ecuted by persons sub|ect to
mtary aw. Ths provson e tends the power to admnster oaths
to ncome ta returns n foregn paces ony to returns of persons
sub|ect to mtary aw.
rtce 2, rtces of War ( ct une , 1920; 1 Stat., 787; 10
U. S. C. ., secton 1 73), defnes persons sub|ect to mtary aw as
beng:

(d) U retaners to the camp and a persons accompanyng or servng wth
the rmes of the Unted States wthout the terrtora |ursdcton of the
Unted States, and n tme of war a such retaners and persons accompanyng
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5 19.53 1
or servng wth the rmes of the Unted States In the fed, both wthn and
wthout the terrtora ursdcton of the Unted Sates, though not otherwse
sub|ect to these artces.
It s beeved that artce 11 , rtces of War, n vestng such
desgnated offcers wth the genera powers of a notary pubc or of a
consu of the Unted States n the admnstraton of oaths to persons
sub|ect to mtary aw, does, to that e tent, authorze them to ad-
mnster oaths for genera purposes, wthn the meanng of secton
19.51- of Reguatons 103, and, hence, authorzes them to admnster
oaths to ncome ta returns of such persons n foregn paces as may
be sub|ect to mtary aw us provded n artce 2(d), rtces of
War.
In vew of the foregong, I. T. 35 6, supra, s modfed to the e tent
nconsstent herewth.
S CTION 53. TIM ND PL C FOR
FILING R TURNS.
Secton 19.53-1: Tme for fng returns. 19 2-20-11099
T. D.51 9
TITL 26 INT RN L R NU C PT R I. SU C PT R . P RT 19.
INCOM T .
Reguatons 103 amended to conform to Pubc aw 90 (Seventy-
seventh Congress), postponng due dates for ncome ta returns
and payment of ncome ta es n case of certan ndvduas n
the mtary or nava forces of the Unted States and certan
cvan empoyees of the Unted States.
Treasurt Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
In order to conform Reguatons 103 Part 19, Tte 26, Code of
Federa Reguatons, 19 0 Sup. to Pubc aw 90 (Seventy-seventh
Congress), approved March 7, 19 2, such reguatons are amende.
as foows:
Paragraph 1. Secton 19.53-1 s amended by addng at the end
thereof the foowng sentence:
For provsons reatng to the tme for fng ncome ta returns In the case
of certan ndvduas n the mtary or nava forces of the Unted States
who are servng on sea duty or outsde the contnenta Unted States, and
n the case of certan cvan empoyees of the Unted States who are prsoners
of war or otherwse detaned by any foregn government wth whch the
Unted States s at war, see secton 19.r 6-(b).
Par. 2. The frst sentence of secton 19.53- s amended to read
as foows:
The due date s the date on or before whch a return s requred to be fed
In accordance wth the provsons of the Interna Revenue Code, or, n the
ease of certan ndvduas, n accordance wth the provsons of Pubc aw 90
(Seventy-seventh Congress), approved March 7, 19 2 (see secton 19.56-1 (b)),
or the ast day of the perod covered by an e tenson of tme granted by the
Commssoner or a coector.
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19.53-1.
9
Par. 3. Immedatey precedng secton 19.56-1, the foowng s
nserted:
Pubc aw 90 (Seventy-seventh Congress), approved March 7, 19 2.
That for the purpose of ths ct
(a) the term person means (1) commssoned offcer, warrant
offcer, ensted person (Incudng persons seected under the Seectve
Tranng and Servce ct, as amended), member of the rmy or Navy
Nurse Corps (femae), wherever servng; (2) commssoned offcer of
the Coast and Geodetc Survey or the Pubc eath Servce; and
(3) cvan offcers and empoyees of departments, durng such tme as
they may be assgned for duty outsde the contnenta mts of the
Unted States or In aska ;

(d) the term department means any e ecutve depart-
ment, ndependent estabshment, or agency (ncudng corporatons)
n the e ecutve branch of the Federa Government.

Sec. 13. Notwthstandng any other provson of aw, n the case of
any ta abe year begnnng after December 81, 19 0, no Federa ncome-
ta return of, or payment of any Federa Income ta by
(a) any Indvdua In the mtary or nava forces of the Unted
States, or
(b) any cvan offcer or empoyee of any department
who, at the tme any such return or payment woud otherwse become
due, s a prsoner of war or s otherwse detaned by any foregn
government wth whch the Unted States s at war, or
(c) any ndvdua n the mtary or nava forces of the Unted
States servng on sea duty or outsde the contnenta Unted States
at the tme any such return or payment woud otherwse become
due,
sha become due unt one of the foowng dates, whchever s the
earest:
(1) the ffteenth day of the thrd month foowng the month n
whc he ceases (e cept by reason of death or ncompetency) to
be a prsoner of war, or to be detaned by any foregn government
wth whch the Unted States s at war, or to be a member of the
mtary or nava forces of the Unted States servng on sea duty
or outsde the contnenta Unted States, as the case may be,
uness pror to the e praton of such ffteenth day he agan s a
prsoner of war, or s detaned by any foregn government wth
whch the Unted States s at war, or s a member of the mtary
or nava forces of the Unted States servng on sea duty or outsde
the contnenta Unted States;
(2) the ffteenth day of the thrd month foowng the month
n whch the present war wth Germany, Itay, and apan s ter-
mnated, as procamed by the Presdent; or
(3) the ffteenth day of the thrd month foowng the month
n whch an e ecutor, admnstrator, or conservator of the estate
of the ta payer Is apponted.
Such due date s prescrbed sub|ect to the power of the Commssoner
of Interna Revenue to e tend the tme for fng such return or payng
such ta , as n other cases, and to assess and coect the ta as pro-
vded In sectons 1 6, 273, and 27 of the Interna Revenue Code n cases
n whch such assessment or coecton s eopardzed and n cases of
bankruptcy or recevershp. For the purpose of ths secton, the term
contnenta Unted States means the States and the Dstrct of
Coumba, and the terms ndvdua or member of the mtary
or nava forces of the Unted States means any person n the rmy of
the Unted States, the Unted States Navy, the Marne Corps, the rmy
or Navy Nurse Corps (femae), the Coast Guard, the Coast and Geo-
detc Survey, or the Pubc eath Servce.
Sec. 1 . The provsons of ths ct, appcabe to persons In the
hands of an enemy, sha appy to any person beeaguered or beseged
by enemy forces.

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19.63-1.
Par. . Secton 19.56-1 s amended by nsertng mmedatey pre-
cedng the frst sentence (a) In genera , and hy nsertng at the
end of such secton the foowng new paragraph ( ) :
(6) Certan ndvduas n mtary or nava forces of Unted States and
certan cvan empoyees of Unted States. Ths paragraph (6) appes
ony to returns and payment of ta for ta abe years begnnng after December
31, 19-10. For the purposes of ths paragraph (6), the terms defned n Pubc
aw 90 (Seventy-seventh Congress), approved March 7, 10 2. sha have the
meanngs so assgned to them.
Under the provsons of sectons 13 and 1 of Pubc aw ). the due date
for any Income a return and for any payment (ncudng any nstament
payment) of ncome ta s postponed n the case of any ndvdua n the mtary
or nava forces of the Unted States who. at the tme the return or payment
woud otherwse become due, s servng on sea duty or outsde the contnenta
Unted States. The new due date, In the case of any such postponement, s
the ath day of the thrd month foowng the month n whch the ndvdua
ceases (e cept by reason of death or ncompetency) to be a member of the
mtary or nava forces of the Unted States servng on sea duty or outsde the
contnenta Unted States, uness pror to the e praton of such 15th day he
s a prsoner of war of, or s detaned by, any foregn government wth whch
the Unted States Is at war, or s beeaguered or beseged by enemy forces, or
s agan a member of the mtary or nava forces servng on sea duty or out-
sde the contnenta Unted States.
Under the provsons of sectons 13 and 1 of Pubc aw 90, the due date
for any ncome ta return and for any payment (ncudng any nstament
payment) of ncome ta s aso postponed n the case of any ndvdua n the
mtary or nava forces of the Unted States or any cvan offcer or empoye
of any e ecutve department, Independent estabshment, or agency (Incudng
corporatons) In the e ecutve branch of the Federa Government who, at
the tme the return or payment woud otherwse become due, s a prsoner
of war of, or s otherwse detaned by, any foregn government wth whch
the Unted States s at war, or s beeaguered or beseged by enemy forces.
The new due date, n the case of any such postponement, Is the 15th day of
the thrd month foowng the month In whch the ndvdua ceases (e cept by
reason of death or Incompetency) to be such a prsoner, or to be so detaned,
beeaguered, or beseged, uness pror to the e praton of such 15th day he
Is a member of the mtary or nava forces of the Unted States servng on
sea duty or outsde the contnenta Unted States, or s agan such a prsoner,
or so detaned, beeaguered, or beseged.
The new due date, f t has not prevousy occurred pursuant to the precedng
provsons of ths paragraph (6), s the earer of the two foowng dntes:
(1) the 15th day of the thrd month foowng the month n whch an
e ecutor, admnstrator, or conservator of the estate of the ta payer Is
apponted; or
(2) the 15th day of the thrd month foowng the month n whch the
present war wth Germany, Itay, and apan Is termnated, as procamed
by the Presdent.
See sectons 19.53-1 to 19.53- , ncusve, for provsons reatng to the tme
when an ncome ta return woud otherwse (that s, but for sectons 13 and
1 of Pubc aw 90), become due.
In case the due date for payng the ta (as dstngushed from the due date
of an Instament of the ta ) s postponed under the provsons of Pubc aw
90, the ta may, at the opton of the ta payer, be pad In accordance wth
the provsons of secton 56(b) of the Interna Revenue Code n four equa
Instaments nstead of n a snge payment. In such case the frst nstament
s to be pad on or before the new due date prescrbed by the provsons of
Pubc aw 90, the second Instament on or before the 15th day of the thrd
month, the thrd nstament on or before the 15th day of the s th month, and
the fourth nstament on or before the 15th day of the nnth month, after
such new due date.
In case the due date for payng an Instament of the ta (other than the
frst Instament) s postponed under the provsons of Pubc aw 90, the due
date of each such nstament so postponed s the snge date prescrbed by
such provsons. The precedng sentence may be ustrated by the foowng
e ampe:
ampe. , a member of the Unted States rmy, s wthn the contnenta
Unted States when hs ncome ta return and ta for the caendar year 19 1
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19.53-2.1
06
become due, and he fes hs return and pays the frst nstament of the ta
on or before the due date. serves on duty outsde the contnenta Unted
States on the dates ( une 15, September 15, and December 15, 19 2) when the
remanng three nstaments normay are payabe. In February, 19 3, he
returns to the contnenta Unted States for duty, and does not agan serve
outsde the contnenta Unted States before May 16, 19 3. The ast three
nstaments on s ncome ta for 19 1 a become due on May 15, 19 3, that s,
on the 15th day of the thrd month foowng the month n whch he ceased to
serve outsde the contnenta Unted States.
Par. 5. Secton 19.217-1 s amended by nsertng after the frst
sentence thereof the foowng sentence:
For provsons reatng to the tme for fng ncome ta returns In the case of
certan ndvduas n the mtary or nava forces of the Unted States and
certan cvan empoyees of the Unted States, see secton 19.5(1-1(6).
Par. 6. Secton 19.218-1 s amended by addng at the end thereof
the foowng sentence:
For provsons reatng to the tme for payment of the ta n the case of certan
ndvduas n the mtary or nava forces of the Unted States and certan
cvan empoyees of the Unted States, see secton 19.56-1(6).
(Ths Treasury decson s ssued under the authorty contaned n
sectons 62 and 3791 of the Interna evenue Code (53 Stat., 32. 67,
26 U. S. C, 19 0 ed., 62, 3791) and sectons 1, 13, and 1 of Pubc aw
90 (Seventy-seventh Congress), approved March 7, 19 2.)
Gut T. everng,
Commssoner of Interna Revenue.
pproved May 11, 19 2.
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster May 12, 19 2, 11.36 a. m.)
Secton 19.53-2: tensons of tme for fng 19 2-5-10975
returns. I. T. 3529
( so Secton 729, secton 30.729-1, Regua-
tons 109.)
INT RN L R NU COD .
Pocy to be foowed wth respect to appcatons for e tensons
of tme for fng Federa ncome and e cess profts ta returns
for the caendar year 19 1 and for fsca years endng n 19 2.
dvce has been requested wth respect to the pocy whch w be
foowed by the ureau of Interna Revenue wth respect to e ten-
sons of tme for fng Federa ncome and e cess profts ta returns
for the caendar year 19 1 and for fsca years endng n 19 2.
Due to the nvovement of ths country n the present word war
and the urgent need for revenue, t s essenta that appcatons for
e tensons of tme for fng Federa ncome and e cess profts ta
returns for the caendar year 19 1 and fsca years endng n 19 2
be aowed ony n those cases where, n the ght of the reasons gven
by the ta payer, the aowance s fuy |ustfed. ccordngy, a
such appcatons for e tensons of tme must show most unusua and
mertorous crcumstances whch |ustfy the e tenson requested.
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97
65.
appcatons for e tensons of tme for fng returns shoud
be fed drecty wth the coector of nterna revenue for the dstrct
n whch the ta payer s requred by aw to fe the return.
ppcatons by ndvduas for e tenson of tme to fe returns
w contnue to be passed upon by the coector of nterna revenue
as heretofore.
ppcatons by corporatons for e tensons of tme to fe returns
whch, n the |udgment of the coector of nterna revenue, do not
mert favorabe acton, w be dened by hm. ppcatons whch,
n hs |udgment, warrant favorabe acton w be referred by hm
to the ureau n Washngton for consderaton. Such appcatons
by corporatons w be granted ony under the crcumstances above
ndcated and then ony by the Commssoner.
Secton 19.53- : Due date of return.
INT RN L R NU COD .
Reguatons 103, amended. (See T. D. 51 9, page 93.)
S CTION 55. PU LICITY OF R TURNS.
19 2-10-11016
T. D.5120
TITL 26 INT RN L R NU C PT R I, P RT 58, SU P RT .
Reguatons governng the nspecton of corporaton statstca
transcrpt cards by the Offce of Prce dmnstraton.
Treasury Department,
Washngton, D. C.
Coectors of Interna Revenue and Others Concerned:
Pursuant to the provsons of sectons 55(a) and 702(b) of the
Revenue ct of 193 ; secton 106(c) of the Revenue ct of 1935;
secton 55(a) of the R venue ct of 1936; sectons 55(a) and 602(c)
of the Revenue ct of 1938; and sectons 55(a) and 603 of the In-
terna Revenue Code, corporaton statstca transcrpt cards pre-
pared bv the ureau of Interna Revenue from corporaton ncome
and decared vaue e cess-profts (termed pror to October 8, 19 0.
merey e cess-profts) ta returns made under the Revenue cts of
193 , 1936, 1938, or the Interna Revenue Code, or under such Rev-
enue cts and Code as amended, for any ta abe year begnnng after
une 30, 1935. and endng before uy 1, 19 1. may be open to nspec-
ton by the Offce of Prce dmnstraton. The nspecton of such
transcrpt cards heren authorzed may be made by any offcer or
empoyee of the Offce of Prce dmnstraton duy authorzed by
the dmnstrator to make such nspecton. Upon wrtten notce by
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98
such dmnstrator to the Secretary of the Treasury gvng the
casses of corporatons whose transcrpt cards t s desred to nspect,
the Secretary and any offcer or empoyee of the Treasury Depart-
ment, wth the approva of the Secretary, may furnsh such Offce of
Prce dmnstraton wth any data on such cards or may make the
cards or any of them avaabe n the offce of the Commssoner of
Interna Revenue for nspecton and copyng by the Offce of Prce
dmnstraton or by such e amners or agents as the dmnstrator
thereof may desgnate. The nformaton so obtaned may be pub-
shed or dscosed n statstca form provded such pubcaton does
not dscose, drecty or ndrecty, the name or address of any cor-
porate ta payer. ( . O. 9076, February 26, 19 2, and sees. 55(a),
702(b), 8 Stat., 698, 770, 106(c), 9 Stat., 1019, sec. 55(a), 9 Stat.,
1671, sees. 55(a), 602(c), 52 Stat., 78, 568, sees. 55(a), 602, 53 Stat.,
29, 111; 26 U. S. C, 55, 3 1, 3 2, 26 U. S. O, 19 0 ed., 55 (a), 603.)
. MORG NT TT, r.,
Secretary of the Treasury.
pproved February 26,19 2.
Frankn D. Roosevet,
The Whte ouse.
(Fed wth the Dvson of the Federa Regster March 2, 19 2, 10.52 a. m.)
CUTI ORD R INSP CTION Y T OFFIC OP PRIC DMINISTR TION
OF CORPOR TION ST TISTIC L TR NSCRIPT C RDS PR P R D FROM INCOM
ND D CL R D LU C SS-PROFITS T R TURNS.
y vrtue of the authorty vested n me by sectons 55(a) and 702(b)
of the Revenue ct of 193 ( 8 Stat., 698, 770); secton 106(c) of the
Revenue ct of 1935 ( 9 Stat., 1019); secton 55(a) of the Revenue
.ct of 1936 ( 9 Stat., 1671); sectons 55(a) and 602(c) of the Revenue
ct of 1938 (52 Stat.. 78, 568); and sectons 55(a) and 603 of the
Interna Revenue Code (53 Stat., 29, 111), t s hereby ordered that
corporaton statstca transcrpt cards prepared by the ureau of
Interna Revenue from corporaton ncome, decared vaue e cess-
profts (termed pror to October 8, 19 0, merey e cess-profts) ta
returns made under the Revenue cts of 193 , 1935, 1936, 1938, or the
Interna Revenue Code, or under such Revenue cts and Code us
amended, for any ta abe year begnnng after une 30. 1935, and
endng before uy 1,19 1, may be open to nspecton by the Offce of
Prce dmnstraton; such nspecton to be n accordance and upon
compance wth the rues and reguatons prescrbed by the Secretary
of the Treasury n the Treasury decson reatng to the nspecton
of such cards by the Offce of Prce dmnstraton, approved by me
ths date.
Ths order sha be pubshed n the Federa Regster.
Frankn D. Roosevet.
The Whte ouse,
February 26,19 2.
(9076)
(Fed wth the Dvson of the Federa Regster February 27, 19 2, 10. 9 a. m.)
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99
55.
19 2-17-1107
T. D.5138
TITL 26 INT RN L R NU . C PT R I, SU C PT R , P RT 58, SU -
P RT I. INSP CTION OF CIS T R TURNS.
Reguatons governng the nspecton of e cse ta returns.
Treasury Department,
Washngton, D. C, pr 15,19 .
To Coectors of Interna Revenue and Others Concerned:
Secton 58.610. Intro DUcroRT.- -(a) Secton 55(a) (2) of the In-
terna Revenue Code, as amended, provdes:
nd a returns made under ths chapter, subchapters , , D, and
of chapter 2, subchapter of chapter 3, chapters , 7, 12, and 21, sub-
chapter of chapter 29, and chapter 30, sha consttute pubc records
and sha be open to pubc e amnaton and nspecton to such e tent as
sha be authorzed n rues and reguatons promugated by the Presdent.
(b) Secton 55 (Tte I) of the Revenue ct of 1932, as amended by
secton 218(h), Tte II, of the Natona Industra Recovery ct,
approved une 16,1933 ( 8 Stat., 195,209), provdes:
Returns made under ths tte sha be open to nspecton n the same
manner, to the same e tent, and sub|ect to the same provsons of aw,
ncudng penates, as returns made under Tte II of the Revenue ct
of 1926; and a returns made under ths ct after the date of enactment
of the Natona Industra Recovery ct sha consttute pubc records
and sha be open to pubc e amnaton and nspecton to such e tent
as sha be authorzed n rues and reguatons promugated by the
Presdent.
(c) Secton 55(a) (Tte I) of the Revenue ct of 193 , provdes:
Returns made under ths tte sha be open to nspecton n the same
manner, to the same e tent, and sub|ect to the same provsons of aw,
ncudng penates, as returns made under Tte II of the Revenue ct
of 1926; and a returns made under ths ct sha consttute pubc
records and sha be open to pubc e amnaton and nspecton to such
e tent as sha be authorzed In rues and reguatons promugated by
the Presdent.
Sec. 58.611. Inspecton of cse Ta Returns. Pursuant to the
above-mentoned provsons of aw e cse ta returns fed wth respect
to any ta mposed by Chapter 7 or 12 or 21, or Subchapter of
Chapter 29, or Chapter 30, of the Interna Revenue Code, or fed
after une 16, 1933, wth respect to any ta mposed by Tte I ,
. or II of the Revenue ct of 1932, or fed wth respect to the
ta mposed by Tte I of the Revenue ct of 193 , or by any of
the above-mentoned provsons as amended, sha be open to nspecton
to the same e tent as provded wth respect to ncome ta returns n
Subpart and sectons 63C.31, 63C.32, 63C.33 (a), 63C.3 , 63C.35,
63C.36, and 63C-37 of Subpart D of Treasury Decson 929, approved
ugust 28,1939 C. . 1939-2, 91 , as amended by Treasury Decson
991, approved uy 20.19 0 C. . 19 0-2,92 26 C. F- 1939 Sup.,
58.301 to 58.307, both ncusve, 58.331 to 58.337, both ncusve,
19 0 Sup., 58.333(a) .
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19.56-1.
100
(Ths Treasury decson s ssued under the authorty contaned
n secton 55(a)(2), as amended, of the Interna Revenue Code (53
Stat., 29, 26 U. S. C., 55, 19 0 ed.); secton 55 (Tte I), as amended,
of the Revenue ct of 1932 ( 7 Stat., 189); and secton 55(a) of the
Revenue ct of 193 ( 8 Stat., 680).)
. MoRG NT U, r.,
Secretary of the Treasury.
pproved pr 20, 19 2.
Frankn D. Roosevet,
The Whte owe.
(Fed wth the Dvson of the Federa Regster pr 21, 10 2, 3.20 p. m.)
S CTION 56. P YM NT OF T .
19 2-9-1100
I. T. 353
INT RN L R NU COD .
Where separate Federa Income ta returns are fed by a husband
and wfe, Treasury notes of Ta Seres -19 3, -19 3, -19 , and
-19 , nscrbed n the name of one spouse, may not be used to
satsfy the ncome ta abty of the other spouse. Ths rue s
equay appcabe where the husband and wfe are resdents of a
communty property State.
dvce s requested whether, n the case of husband and wfe fng
separate Federa ncome ta returns, Treasury notes of Ta Seres
-19 3, -19 3, -19 , and -19 , nscrbed n the name of one
spouse, may be used to satsfy the ncome ta abty of the other
spouse. The nqury reates partcuary to such returns fed n
communty property States.
In vew of the provsons of Treasury Department Crcuar No. 667
(C. . 19 1-2,112), as amended. Treasury Department Crcuar No. 67
page 361, ths uetn , and Treasury Decson 5109 page 359, ths
uetn , t s hed that where separate Federa ncome ta returns
are fed by a husband and wfe, Treasury notes of Ta Seres -19 3.
-19 3, -19 , and -19 . nscrbed n the name of one spouse,
may not be used to satsfy the ncome ta abty of the other spouse.
Ths rue s equay appcabe where the husband and wfe are
resdents of a communty property State.
Secton 19.56-1: Date on whch ta sha be pad.
INT RN L R NU COD .
Reguatons 103, amended. (See T. D. 51 9, page 93.)
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101
19.101-1.
SU C PT R C SUPPL M NT L PRO ISIONS.
SUPPL M NT . R T S OF T .
S CTION 101. MPTIONS FROM T
ON CORPOR TIONS.
Secton 19.101-1: Proof of e empton. 19 2-11-11025
T. D. 5125
TITL 26 INT RN L R NU . C PT R I, SU C PT R , P RT 19.
INCOM T .
mendng reguatons 103 as to proof of e empton of organza-
ton and makng such amendment appy to Reguatons 101, 9 ,
86, and 77.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. 0.
To Coectors of Interna Revenue and Others Concerned:
Paragraph 1. Secton 19.101-1 of Reguatons 103 Part 19, Tte 26,
Code of Federa Reguatons, 19 0 Sup. s amended to read as
foows:
Sec. 19.101-1. Proof of e empton. corporaton s not e empt merey because
t s not organzed and operated for proft. In order to estabsh ts e empton
t s necessary that every organzaton camng e empton fe wth the co-
ector for the dstrct n whch s ocated the prncpa pace of busness or
prncpa offce of the organzaton an affdavt or a questonnare as set forth
beow. n organzaton camng e empton under secton 101 (1), (3), ( ),
e cept a bona fde credt unon, (6), (7), (8), (9), (10), (12), (1 ), or (16)
sha fe the form of questonnare approprate to ts actvtes, fed out n
accordance wth the nstructons on the form or ssued therewth. Copes
of the foowng questonnare forms may be obtaned from any coector:
For corporatons camng e empton under secton 101(6), Form 1023; under
secton 101 (1), (3), (7), or (8), Form 102 ; under secton 101(9), Form 1025;
under secton 101 (10), (1 ), or (16), Form 1026; under secton 101( ), e cept
bona fde credt unons, Form 1027; and under secton 101(12), Form 1028.
other organzatons camng e empton, ncudng bona fde credt unons, sha
fe an affdavt showng the character of the organzaton, the purpose for whch
t was organzed, ts actua actvtes, the sources of ts ncome and the dspos-
ton of such ncome, whether or not any of ts ncome s credted to surpus or
may nure to the beneft of any prvate sharehoder or ndvdua, and n gen-
era a facts reatng to ts operatons whch affect ts rght to e empton.
To each such affdavt or questonnare sha be attached a copy of the artces
of ncorporaton, decaraton of trust, or other nstrument of smar mport,
settng forth the permtted powers or actvtes of the organzaton, the by-aws
or other code of reguatons, and the atest fnnnca statement showng the
assets, abtes, recepts, and dsbursements of the organzaton. n organza-
ton camng e empton under secton 101 (5), (6), e cept organzatons or-
ganzed and operated e cusvey for regous purposes, (7), (8), (9), or (1 ),
sha aso fe wth the other nformaton specfed heren a return of nformaton
on Form 990 reatve to the busness of the organzaton for the ast compete
year of operaton.
The words prvate sharehoder or ndvdua n secton 101 refer to ndvd-
uas havng a persona and prvate nterest n the actvtes of the corporaton.
though regous or apostoc assocatons or corporatons e empt under secton
101(18) are reeved from payng the ta , they are requred to fe returns of
ncome (see secton 19.101(18)- ).
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19.101-.
102
In the case of the partcuar casses of organzatons sted beow, the foow-
ng addtona nformaton sha be emboded n or attached to, and made a
part of, the affdavt or questonnare referred to above:
(a) Mutua nsurance companes sha submt (1) copes of the poces or
certfcates of membershp; (2) f any substanta amount of ncome s camed
to be hed for the payment of osses or e penses, a statement based upon a
reabe tabe of oss e perence demonstratng that the amount so hed for
the payment of osses s reasonaby necessary; or n the case of e penses, a
statement based upon reabe statstcs showng that the e penses were ncurred
or that n a probabty they w be ncurred;
(6) In the case of hodng companes camng e empton under secton 101(1 ),
f the organzaton for whch tte s hed has not been specfcay notfed n
wrtng by the ureau of Interna Revenue that It Is hed to be e empt under
secton 101, the hodng company sha submt the nformaton ndcated heren
as necessary for a determnaton of the status of the organzaton for whch tte
s hed.
The coector, upon recept of the affdavt, or questonnare, and other papers,
w e amne them as to competeness and w forward competed documents to
the Commssoner for decson as to whether the organzaton s e empt. In
addton to the Informaton specfed heren, the Commssoner may requre any
addtona nformaton deemed necessary for a proper determnaton of whether
a partcuar organzaton s e empt under secton 101, and when deemed advs-
abe n the Interest of an effcent admnstraton of the nterna revenue aws
he may n the cases of partcuar types of organzatons provde addtona ques-
tonnares or otherwse prescrbe the form In whch the proof of e empton sha
be furnshed.
When an organzaton has estabshed ts rght to e empton, It need not
thereafter make a return of Income or any further showng wth respect to
ts status under the aw, uness t changes the character of Its organzaton
or operatons or the purpose for whch t was orgnay created, e cept that
every organzaton e empt or camng e empton under secton 101 (5), (6),
e cept organzatons organzed and operated e cusvey for regous purposes,
(7), (8), (9), or (1 ), sha fe annuay returns of nformaton on Form 990
wth the coector for the dstrct n whch Is ocated the prncpa pace of bus-
ness or prncpa offce of the organzaton. The frst return of nformaton on
Form 990 requred by ths reguaton sha be for the ta abe year endng n
19 1 and sha be fed on or before May 15,19 2. The returns for subsequent ta -
abe years sha be fed on or before the 1st day of the thrd month foowng
the cose of the ta abe year. See secton 19.101 (18)-1 wth respect to returns
by regous or apostoc assocatons or corporatons e empt under secton
101(18). See aso sectons 275(a) and 276(a) wth respect to the statute of
mtatons.
Coectors w keep a st of a organzatons hed to be e empt to the end
that they may occasonay nqure nto ther status and ascertan whether or
not they are observng the condtons upon whch ther e empton s predcated.
The e empton under secton 101 referred to n ths secton and sectons
19.10 D-1 to 19.101(13)-1, ncusve, from fng returns of ncome does not
appy to returns of Informaton (see sectons 1 7 to 1 9, ncusve).
Par. 2. The foregong provsons reatve to proof of e empton
under secton 101 of the Interna Revenue Code are hereby made app-
cabe n the case of any organzaton whch cams e empton under
the Revenue ct of 1938,1936, 193 , or 1932 and whch has not proven
e empton under the correspondng provsons of Reguatons 101
rPart 9. Tte 26, Code of Federa Reguatons, 1939 Sup. , 9 Part
3, Tte 26, Code of Federa Reguatons , 86, or 77 The foregong pro-
vsons reatve to the fng annuay of returns of nformaton on
Form 990 are hereby made appcabe to organzatons hed e empt
under the sectons of the Revenue ct of 1938, 1936, 193 , or 1932
whch correspond to secton 101 (5), (6), (7), (8), (9), or (1 ) of the
Interna Revenue Code.
(Ths Treasury decson s ssued under the authorty contaned
n sectons 62 and 101 of the Interna Revenue Code (53 Stat., 32, 33,
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103
19.101(6)- .
as amended by 53 Stat., 876, 26 U. S. C, 19 0 ed., 62, 101); sectons
62 and 101 of the Revenue cts of 1938, 1936, and 193 (52 Stat, 80,
26 U. S. C, Sup., 62, 101; 9 Stat., 1673, 26 U. S. C. Sup., 62, 101;
8 Stat., 700, 26 U. S. C, 62, 101); and sectons 62 and 103 of the
Revenue ct of 1932 ( 7 Stat., 191, 193).)
Norman D. Cann,
ctng Commssoner of Interna Revenue.
pproved March 5, 19 2.
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster March 6, 19 2, 9.51 a. m.)
Secton 19.101 (6)-: Regous, chartabe, 19 2-6-10983
scentfc, terary, and educatona or- G. C. M. 23063
ganzatons and communty chests.
INT RN L R NU COD ND 1 RIOR R NU L WS.
The decson of the Unted States Crcut Court of ppeas for
the Second Crcut n Roche s each, Inc., v. Commssmer (96
Fed. (2d), 776, Ct. D. 1359, C. . 1938-2, 230), hodng that a corpo-
raton organzed for the purpose of, and engagng n, busness
actvtes was e empt from Income ta aton under secton 103(6)
,of the Revenue ct of 1928 as a corporaton organzed and operated
|e cusvey for chartabe purposes, athough t dd not dspense
charty but merey produced ncome for such purpose to be admn-
stered by another ta -e empt corporaton, shoud no onger be
foowed by the ureau.
G. C. M. 20853 (C. . 1938-2, 166), G. C. M. 21610 (C. . 1939-2,
103), and G. C. M. 22116 (C. . 19 0-2, 100) modfed.
Reconsderaton has been gven to the queston whether the ureau
shoud contnue to foow the decson of the Unted States Crcut
Court of ppeas for the Second Crcut n Roche s each, Inc., v.
Commssoner (96 Fed. (2d), 776, Ct. D. 1359, C. . 1938-2, 230).
In Roche s each, Inc., v. Commssoner, supra, an ndvdua,
shorty before hs death, organzed a busness corporaton to whch
he transferred hs rea estate and bathng beach busness n e change
for a of the corporaton s capta stock. y hs w e ecuted on
the date of transfer he bequeathed the stock to testamentary trustees
for the purpose of estabshng a chartabe foundaton. In ac-
cordance wth the ntenton e pressed n hs w, the net ncome of
the busness corporaton was, after testator s death, devoted e -
cusvey to the foundaton for the chartabe purposes set forth n
the w. It was hed that such busness corporaton was e empt
from ncome ta aton under secton 103(6) of the Revenue ct of
1928 as a corporaton organzed and operated e cusvey for chartabe
purposes, athough t dd not dspense charty but merey produced
ncome for such purpose to be admnstered by another ta -e empt
corporaton.
The decson n the Roche s each, Inc., case, athough contrary
to the genera poston theretofore taken by the ureau, was accepted
as a precedent n other cases nvovng facts substantay the same
as those obtanng n that case. (See G. C. M. 21610, C. . 1939-2,
103.)
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I 19.101(6)- .
10
In G. C. M. 20853 (C. . 1938-2, 166) and G. C. M. 22116 (C. .
19 0-2, 100) the prncpe ad down n Roche s each, Inc., v.
Commssoner, supra, was recognzed.
Ths offce has gven further consderaton to the genera queston
nvoved, and s now of the opnon that the decson of the Unted
States Crcut Court of ppeas for the Second Crcut n Roche s
each, Inc., v. Commssoner, supra, shoud no onger be foowed
by the ureau. ccordngy, G. C. M. 20853, G. C. M. 21610, and
G. C. M. 22116 are hereby modfed to the e tent that they end ap-
prova to the decson n Roche s each, Inc., v. Commssoner, supra.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
Secton 10.101 (6)-: Regous, chartabe, scen- 19 2-20-11097
tfc, terary, and educatona organzatons I. T. 3550
and communty chests.
( so Secton 23(o). Secton 19.23(o)-; Secton
23 (q), Secton 19.23 (q)-.)
INT RN L R NU COD ND PRIOR R NU CTS.
The Navy Reef Socety s entted to e empton under secton
101(6) of the Interna Revenue Code and correspondng prov-
sons of pror Revenue cts.
Contrbutons to the socety are deductbe from gross ncome
for Federa ncome ta purposes by ndvduas and corporatons,
sub|ect to the mtatons provded n sectons 23(o) and 23 (q) of the
Code, respectvey, and correspondng provsons of pror Revenue
cts.
dvce s requested whether the Navy Reef Socety s e empt
from Federa ncome ta aton under the provsons of secton 101(6)
of the Interna Revenue Code and correspondng provsons of pror
Revenue cts, and whether contrbutons thereto are aowabe
deductons n the ncome ta returns of the donors.
The Navy Reef Socety was ncorporated n 190 under the aws
of the Dstrct of Coumba. The partcuar ob|ects and busness
of the socety, as set forth n ts amended certfcate of ncorporaton,
are as foows:
to coect funds and provde reef for dependent wdows, mnor
orphan chdren, and mothers of deceased offcers and ensted men of the
reguar Navy and Marne Corps of the Unted States; to ad n securng em-
poyment for such wdows and mothers, and n the educaton of such orphan
chdren.
The ad of the socety may aso, wth the approva of the board of man-
agers, be e tended n speca cases of dstress to persons of the reguar Navy
and Marne Corps, or to the members of ther fames.
It appears that the socety asssts the dependents of offcers and
men who de whe n the nava servce and grants oans, wthout
nterest charge, to men n the servce to ad them n payng for
the hosptazaton of ther fames. Operatons are carred on
through au ares ocated at nava statons. arous au ares
make speca arrangements for hosptazaton and for vstng nurses
to care for nava personne. Income s derved from the sae or Chrst-
mas cards, card partes, donatons, footba games, entertanments,
etc. Funds are dsbursed for the hosptazaton of dependents of
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105
19.101(11)- .
offcers and ensted men of the reguar Navy and Marne Corps,
emergency oans, reef gratutes, and operatng e penses.
It s hed that the Navy Reef Socety s entted to e empton
under the provsons of secton 101(6) of the Interna Revenue Code
and the correspondng provsons of pror Revenue cts.
Contrbutons made to the Navy Reef Socety by ndvdua
donors are deductbe by such ndvduas n arrvng at ther ta -
abe net ncome n the manner and to the e tent provded by secton
23 (o) of the Interna Revenue Code and the correspondng prov-
sons of pror Revenue cts. Contrbutons to the socety by cor-
poratons are deductbe to the e tent provded by secton 23 (q) of
the Code and the Revenue cts of 1936 and 1938.
Secton 19.101 ()-: Farmers or other mutua 19 2-21-1110
ha, cycone, casuaty, or fre nsurance com- I. T. 3552
panes or assocatons.
INT RN L R NU COD .
The purchase of Unted States defense savngs bonds and the
recept of Income therefrom by farmers mutua Insurance companes
w not affect the status of such companes whch have been hed
to be e empt from Federa ncome ta aton under the provsons
of secton 101(11) of the Interna Revenue Code or the correspond-
ng provsons of pror Revenue cts.
dvce s requested whether farmers mutua nsurance companes,
whch have been hed to be e empt from Federa ncome ta aton
under secton 101(11) of the Interna Revenue Code or the corre-
spondng provsons of pror Revenue cts, w |eopardze such
e empt status by the purchase of Unted States defense savngs bonds
and the recept of ncome therefrom.
Secton 101(11) of the Interna Revenue Code provdes that the
foowng organzatons sha be e empt from ta aton under Chapter
1 of the Code, reatng to ncome ta :
Farmers or other mutua ha, cycone, casuaty, or re Insurance companes
or assocatons (ncudng nternsurers and recproca underwrters) the Income
of whch s used or hed for the purpose of payng osses or e penses;
Correspondng provsons of the Revenue ct of 1938 and pror
Revenue cts contan anguage whch s dentca wth the above-
quoted anguage.
In I. T. 3 99 (C. . 19 1-2, 78) t was hed that the M Lodge, whch
has been hed to be e empt from Federa ncome ta under secton
101 (3) of the Interna Revenue Code, s not sub|ect to Federa ncome
ta on nterest receved by t on Unted States savngs bonds. I. T.
3 99, supra, reads n part as foows:
Therefore, any organzaton whch has estabshed ts e empton from Federa
ncome ta aton under the provsons of secton 101 of the Interna Revenue
Code or correspondng provsons of pror Revenue cts s not abe to Federa
ncome ta on any of ts ncome, ncudng nterest on, and the gan from the
sae of. Unted States bonds ssued before, or on or after, March 1, 19 1.
It s hed that the purchase of Unted States defense savngs bonds
and the recept of ncome therefrom by farmers mutua nsurance
companes w not affect the status of such companes whch have
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19.111-1.
106
been hed to be e empt from Federa ncome ta aton under the
provsons of secton 101(11) of the Interna Revenue Code or the
correspondng provsons of pror Revenue cts.
SUPPL M NT . COMPUT TION OF N T INCOM .
S CTION 111. D T RMIN TION OF MOUNT OF,
ND R COGNITION OF, G IN OR LOSS.
Secton 19.111-1: Computaton of gan or oss.
INT RN L R NU COD .
Gan or oss on machnes used on certan Government contracts.
(See I. T. 3533, page 87.)
Secton 19.111-1: Computaton of gan or oss. 19 -2-19-11082
G. C. M. 23162
INT RN L R NU COD .
Under the terms of a fowage deed e ecuted In consderaton
of a certan sum of money, the ta payer corporaton granted, sod,
and conveyed to the Unted States a perpetua easement to food
desgnated propertes at such Infrequent ntervas as not to deprve
the ta payer of any substanta benefca use of the propertes; the
corporaton dd not se and dspose of the ands and Improvements
concerned, nor dd It merey receve payment n advance for antc-
pated future damages to ts trad or busness.
ed: The amount receved shoud be apped by the ta payer
corporaton aganst the cost or other bass of the propertes to whch
the easement appertans n determnng gan or oss from sae or
other dsposton of the propertes. In the event that the payment
e ceeds the bass for determnng gan or oss on the propertes
affected by tho easement, the e cess woud consttute recognzed
gan for the ta abe year In whch the payment was receved or
accrued.
n opnon s requested wth respect to the status, for Federa
ncome ta purposes, of an amount receved by-a ta payer corpora-
ton from the Federa Government n connecton wth ts food contro
pro|ects on the Msssspp Rver and ts trbutares.
The payment made was consderaton for an agreement whereby
the Government was granted the rght under certan condtons, to
food desgnated portons of the propertes of the ta payer, the atter,
however, retanng tte to the and and fu use thereof e cept when
t s fooded. The amount of the payment appears to be ess than the
gan or oss bass of the and and mprovements thereon.
Under the provsons of a fowage deed e ecuted n anuary,
19 1, the ta payer corporaton granted, sod, and conveyed to the
Unted States or ts assgns:
the fu, compete, and perpetua rght, power, prvege, and easement or
servtude In, on, and to the ands descrbed beow, for the purpose of utzng
the same as a foodway, of overfowng by foodwaters of the Msssspp Rver
and ts trbutares n accordance wth the provsons of ct No. 391, Seventeth
Congress, beng n ct for the contro of foods on the Msssspp Rver and
Its trbutares, and for other purposes, approved May 15, f S, as amended by
Pubc ct No. 678, Seventy-fourth Congress, approved une 1.1, 1938, and Pubc
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107
15 19.111 .
ct No. 761, Seventy-ffth Congress, approved une 28, 1938 52 Stat., 12151 ;
the and u, on, and to whch the rghts above descrbed are offered, beng
descrbed as foows: ere foows descrpton of certan tracts or parces of
and.
such rghts and prveges In and to the sad above-descrbed property as
may be used and en|oyed wthout Interferng wth or abrdgng the prveges,
rghts, easements and servtudes hereby conveyed to the Unted States are
e pressy reserved to the owners.
The sad vendor hereby reeases the Unted States of merca or ts assgns,
cffcers, agents, and empoyees from any and a cams for any and a oss,
-osts, damage, or e pense resutng from overfow and the e ercse of the ease-
ments or servtudes heren conveyed.
To have and to hod the rghts, powers, prveges, and easements or servtudes
hereby conveyed unto the Unted States of merca, or ts assgns, forever.
The prce and consderaton for ths transfer and conveyance Is the sum of
doars, cash n hand pad, the recept and adequacy of whch s hereby
acknowedged and fu acquttance and dscharge granted therefor.
The provson of secton of Pubc ct No. 761, supra, pursuant
to whch the easement agreement was obtaned, reads n part as
foows:
The Unted States, rrespectve of other provsons of aw, may, wthn the
dscreton of the Chef of ngneers, acqure fowage easements over a ands
not sub|ect to frequent overfow n the tchafaaya asn beow the attude of
rotz Sprngs.
The ta payer s propertes whch are covered by the fowage deed
consst of certan portons of two ots, together wth a mprove-
ments thereon, upon the arger one of whch the ta payer s pant
s ocated. That s a the and whch the ta payer has n ths par-
tcuar foodway area. The pant s stuated on fed-n and whch,
though cose to the water s edge of a bay, s a few feet hgher than a
nearby raroad brdge. s protecton to the propertes, there s a
sea wa about feet hgh, and the pant s about 3 feet off the ground.
The ta payer s use of the propertes has not thus far been changed or
affected n any way whatsoever as a resut of the fowage easement
granted by the ta payer.
n easement has been defned as a rght whch one person has to
use the and of another for a specfc purpose or a servtude mposed
as a burden upon and (17 mercan ursprudence, asements,
secton 2, page 923). (To the same effect, see Tffany on Rea Prop-
ertv, 3rd edton, chapter 1 , secton 756.)
Informaton submtted by a representatve of the dtrct engneer
for the War Department shows that the eevaton of the and n the
nstant case s such that overfow shoud occur about once a year
for ow areas and about once every 160 years for hgh areas. The
ta payer s presdent stated that every year there woud be some food-
ng of the property by ordnary hgh water, but wth no damage to
the pant, and that ony n the event of an unusua food every 10
or 15 years woud there be damage to the pant. It s apparent, there-
fore, that the facts of ths case ceary dstngush t from Z7. L. Scaes
v. Commssoner (10 . T. ., 102 , acquescence, C. . II-2, 35
(1928)), wheren the oard of Ta ppeas aowed a oss as a deduc-
ton, hodng that a grant of a perpetua easement and rght of way
to a evee mprovement dstrct, by whch the owner was deprved of
practcay a benefca nterest theren and was merey the hoder
of the bare ega tte, shoud be consdered a sae for the purposes of
that proceedng. In the Scaes case, as a resut of the conveyance of the
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19.112(f)-.
108
easement and rght of way and the work done by the evee mprove-
ment dstrct, the and was covered wth water about 10 months every
year, usuay from 8 to 12 feet deep, and at no tme after the construc-
ton of a evee was t free of overfow for more than 2 months at a tme.
ccordng to statements made by the representatve of the dstrct
engneer for the War Department, the amount pad by the Unted
States for the fowage easement n the nstant case represents 20 per
cent of the fee vaue, was determned from a fee apprasa of the
and and mprovements, and was the ma mum amount consdered rea-
sonabe by the War Department. e stated further t s consdered
that the rghts of the Government under the easement w not affect
the vaue of the ta payer s propertes n e cess of the prce pad for
the easement and that, snce the acquston of easements n the area
s dscretonary, condemnaton to acqure tte woud not ordnary
be resorted to shoud a property owner refuse to e ecute an agree-
ment, n whch event cams for damages woud have to be entertaned
n case of overfow. In other words, the consderaton for the fow-
age deed was measured, at east n so far as was possbe by nego-
taton and wthout resort to the rght of emnent doman or tga-
ton, by the estmated dmnuton n vaue of the affected propertes
(for any and a purposes for whch they were or mght be utzed)
caused by the burden of the fowage easement.
In vew of the foregong, t s the opnon of ths offce that the
ta payer corporaton, under the fowage deed e ecuted by t n
consderaton of the payment of a specfed sum of money, granted,
sod, and conveyed to the Unted States a perpetua easement to food
the desgnated propertes at such nfrequent ntervas as not to deprve
the ta payer of any substanta benefca use of the propertes, and
that the corporaton dd not, n form or effect, se and dspose of the
and and mprovements concerned, nor merey receve payment n
advance for antcpated future damages to ts trade or busness. c-
cordngy, the amount receved shoud be apped by the ta payer
corporaton aganst the cost or other bass of the propertes to whch
the easement appertans n determnng gan or oss from subsequent
sae or other dsposton of the propertes. In the event that such a
payment n any smar case shoud e ceed the bass for determnng
gan or oss on the propertes affected by the easement, the e cess woud
consttute recognzed gan for the ta abe year n whch the payment
was receved or accrued. (Cf. I. T. 2621, C. . I-1, 67 (1 932).)
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
S CTION 112(f). R COGNITION OF G IN OR LOSS:
IN OLUNT RY CON RSIONS.
Secton 19.112(f)-: Renvestment of proceeds 19 2-22-11110
of nvountary converson. I. T. 355
INT RN L R NU COD .
The confscaton by a State of dary catte rased by , the ta -
payer, because of ther reacton to a dsease test, and the purchase
by hm of smar catte to repace them consttute an nvountary
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109
19.112(f)- .
converson of property under the provsons of secton 112(f) of
the Interna Revenue Code on whch no gan or oss Is recognzed,
provded the money receved for the confscated catte can be def-
ntey traced as havng been e pended forthwth In the purchase of
smar catte. Where the amount pad for the catte purchased
to repace those confscated Is greater than the amount receved
from the State, the bass for gan or oss of the former s the df-
ference between the amount pad for them and the amount re-
ceved from the State.
dvce s requested whether the confscaton by a State of dary
catte rased by a ta payer, because of ther reacton to a dsease
test, and the purchase by the ta payer of smar catte to repace
them consttute an nvountary converson of property under the
provsons of secton 112(f) of the Interna Revenue Code.
, the ta payer, was requred durng the year 19 1 to dspose of a
number of hs dary catte for the sum of doars, nasmuch as the
catte reacted to a certan dsease test and were confscated under
the aws of the State. These catte had been rased by . In order
to repace them, he mmedatey purchased other dary catte at a
greater cost than the amount receved from the State for the con-
fscated catte.
Secton 112(f) of the Interna Revenue Code reads n part as
foows:
(f) Invountary Conversons. If property (as a resut of an
e ercse of the power of requston or condemnaton ) Is compu-
sory or Invountary converted nto money whch s forthwth In
good fath, under reguatons prescrbed by the Commssoner wth the ap-
prova of the Secretary, e pended n the acquston of other property smar
or reated n servce or use to the property so converted, no gan
or oss sha be recognzed. If any part of the money s not so e pended, the
gan, If any, sha be recognzed, but n an amount not n e cess of the money
whch s not so e pended.
Secton 19.112(f)- of Reguatons 103, reatng to renvestment
of proceeds of nvountary converson, states that the provsons of
secton 112(f) of the Code, supra, are appcabe to property used
for farmng purposes.
On the bass of the above-stated facts, t s hed that may treat
the confscaton by the State of hs darv catte, as the resut of ther
reacton to a dsease test, and the purchase of other dary catte to
repace them as an nvountary converson of property under the
on whch no gan or oss s recognzed, provded the money receved
for the confscated catte can be defntey traced as havng been e -
pended forthwth n the purchase of smar catte. (See secton
19.112(f)- of Reguatons 103, supra.)
ssumng that the confscated catte had a zero bass for gan or
oss purposes, snce they were rased by the ta payer and presum-
aby a e penses ncdent to ther rasng were camed as deductons
n Federa ncome ta returns for pror years, the bass of the newy
acqured catte s the dfference between the amount pad for such
catte and the amount receved from the State for those whch were
confscated.
provsons of secton
Interna Revenue
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19.113(a) (2)-.
110
S CTION 113(a). D UST D SIS FOR D T RMINING
G IN OR LOSS: SIS (UN D UST D) OF PROP RTY.
Secton 19.113(a) (2)-: Property transmtted 19 2-16-11068
by gft after December 31, 1920. T. D. 5137
( so Secton 19.113(a) (3)-.)
TITL 26 INT RN L R NU . C PT R I, SU C PT R . P RT 19.
INCOM T .
mendng secton 19.113(a) (2)- of Reguatons 103 and artce
113(a) (2)- of Reguatons 101, 9 , and 86, reatng to the bass
of property acqured by gft after December 31, 1920, and amend-
ng secton 19.113(a) (3)- of Reguatons 103 and artce
113(a) (3)- of Reguatons 101, 9 , and 86, reatng to the bass
of property acqured by transfer n trust after December 31, 1920.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
Paragraph 1. Secton 19.113(a) (2)- of Reguatons 103 Part 19,
Tte 26, Code of Federa Reguatons, 19 0 Sup. and artce
113(a) (2)- of Reguatons 101 secton 9.113(a) (2)-, Tte 26,
Code of Federa Reguatons, 1939 Sup. , of Reguatons 9 secton
3.113(a) (2)-, Tte 26, Code of Federa Reguatons , and of
Reguatons 86 are amended as foows:
( ) y changng subsecton (a) to read as foows:
(a) Property ncuded. Secton 113(a)(2) appes to a property acqured
after December 81,1920, by gft. It does not appy to property acqured by
(1) transfer n trust (see secton 113(a) (3)) ; or
(2) devse or bequest (see secton 113(a)(5)).
Secton 113(a)(2) appes to a gfts of whatever descrpton (e cept gfts
made by a transfer n trust), whenever and however made, perfected, or takng
effect; whether n contempaton of or ntended to take effect n possesson or
en|oyment at or after the donor s death; or whether made by means of the
e ercse (other than by w) of a power of appontment or revocaton, or any
other power.
( ) y changng the thrd sentence of the second paragraph of
subsecton (b) to read as foows:
In the hands of every person acqurng property by gft, the bass s aways
the same, whether such person receves the property mmedatey upon the
transfer by th donor, or as remanderman under the Instrument of gft, or
whether such person s any other person to whom such unform bass U
appcabe.
(C) y strkng subsecton (d) thereof, and by reetterng sub-
secton (e) as subsecton (d).
Par. 2. Secton 19.113(a) (3)- of such Reguatons 103 and artce
113(a) (3)-1 of such Reguatons 101, 9 , and 86 are amended by
strkng as a gft by transfer n trust, or n the second sentence
thereof, and by strkng the ast sentence of the frst paragraph.
(Ths Treasury decson s ssued under the authorty contaned n
sectons 62, 113(a)(2), and 113(a)(3) of the InternaRevenue Code
(53 Stat., 32, 0, and 1:26 U. S. C, sectons 62,113(a) (2), 113(a) (3)),
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I It 19.116-3.
and sectons 62, 113(a)(2), and 113(a)(3) of the Revenue cts of
1938, 1936, and 193 (52 Stat, 80, 90; 9 Stat., 1673, 1682; 8 Stat.,
700,706).)
Guy T. everno,
Commssoner of Interna Revenue.
pproved pr 11, 19 2.
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster pr 13, 19 2, 3. 5 p. m.)
Secton 19.113(a) (3)-: Transfer n trust after
December 31, 1920.
INT RN L R NU COD .
Reguatons 103, amended. (See T. D. 5137, page 110.)
S CTION 115. DISTRI UTIONS Y CORPOR TIONS.
Secton 19.115-3: arnngs or profts. 19 2-13-11037
( so Secton 718; Reguatons 109, Secton 30.718-2.). I. T. 35 3
INT RN L R NU COD .
For purposes of both nvested capta and dvdends, In the case
of a corporaton eectng the amortzaton deducton as prescrbed
n secton 12 of the Interna Revenue Code, as amended, the earn-
ngs and profts are reduced by amortzaton of the bass of emergency
factes.
dvce has been requested concernng the effect of amortzaton of
the bass of emergency factes a deducton from gross ncome wth
respect to such amortzaton beng authorzed n sectons 23 (t) and
12 of the Interna Revenue Code, as amended upon (1) earnngs
and profts as a factor n the determnaton of equty nvested capta
under secton 718(a) for e cess profts ta purposes, and upon (2)
earnngs or profts out of whch corporate dstrbutons to sharehoders
may be made as dvdends under secton 115(a) for ncome and e cess
profts ta purposes.
very corporaton, at ts eecton, as prescrbed n secton 12 , supra,
s entted to the deducton wth respect to the amortzaton of the
ad|usted bass, determned under secton 12 (f), of any propery
certfed emergency facty (secton 12 (e)) based on a perod of 60
months. The deducton wth respect to amortzaton s whoy or
partay (secton 12 (g)) n eu of (secton 12 (a)) the deducton
provded by secton 23(1) reatng to e hauston, wear and tear, and
obsoescence.
For purposes of both nvested capta and dvdends, n the case
of a corporaton eectng the amortzaton deducton as prescrbed n
secton 12 , 6upra, the earnngs and profts are reduced by amortza-
ton of the bass of emergency factes. (Cf. secton 19.115-3,
Reguatons 103, as amended by t. D. 502 , C. . 19 0-2, 110.)
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19.12 -2.
112
S CTION 116. CLUSIONS FROM GROSS INCOM .
Secton 19.116-1: Income of foregn governments, 19 2-10-11021
ambassadors, and consus. T. D. 512
TITL 26 INT RN L R NU C PT R I, SU C PT R , P RT 10.
INCOM T .
Income of ambassadors, mnsters, and other dpomatc per-
sonne Reguatons 103 amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. 0.
To Coectors of Interna Revenue and Others Concerned:
Paragraph 1. Secton 19.116-1 of Reguatons 103 Part 19, Tte
26, Code of Federa Reguatons, 19 0 Sup. s amended
) y strkng out the second paragraph thereof.
) y emnatng from the thrd paragraph thereof the foowng:
(other than ambassadors, mnsters, and members of ther househods, ncudng
secretares, attaches, and servants).
Par. 2. The amendment made by ths Treasury decson sha be
effectve for ta abe years begnnng after December 31, 19 1.
(Ths Treasury decson s ssued under the authorty of secton 116
of the Interna Revenue Code (53 Stat., 56,26 U. S. C, 19 0 d., 116).)
Norman D. Cann,
ctng Commssoner of Interna Revenue.
pproved March 5, 19 2.
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster March 6, 19 2, 9.51 a. m.)
S CTION 117. C PIT L G INS ND LOSS S.
Secton 19.117-1: Meanng of terms.
INT RN L R NU COD .
cceptance by credtor of vountary conveyance of property, n-
cudng property pedged as securty for the debt, n parta or n
fu satsfacton of the unpad porton of the ndebtedness. (See
I. T. 35 8, page 7 .)
S CTION 12 . MORTIZ TION D DUCTION.
Secton 19.12 -2: mortzaton deducton 19 -9-11006
Genera rue. T. D. 5119
( so Secton 19.12 -9.)
TITL 26 INT RN L R NU . C PT R I, SU C PT R , P RT 19. INCOM
T .
Reguatons 103 amended to conform to Pubc aw 36 (Seventy-
seventh Congress), smpfyng the procedure n connecton wth the
amortzaton of certan factes.
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113
5 19.12 -2.
Treasury Department,
Offce or Commssoner or Interna Revenue,
Washngton, D. O.
To Coectors of Interna Revenue and Others Concerned:
In order to conform Reguatons 103 Part 19, Code of Federa
Reguatons, 19 0 Sup. to the provsons of Pubc aw 36 (Seventy-
seventh Congress), approved February 6, 19 2, such reguatons are
amended as foows:
Paragraph 1. y nsertng mmedatey precedng secton 19.12 -1,
as added by Treasury Decson 5016. approved October 23,19 0 C. .
19 0-2. 119 , and as amended by Treasury Decson 5019, approved
May 29,19 1 C. . 19 1-1,255 , and Treasury Decson 510 , approved
December 23, 19 1 C. . 19 1-2, 131 , the foowng:
Pubc aw 36, approved February 6, 19 2.
Resoved by the Senate and ouse of Representatves of the Unted States of
merca n Congress assembed, That, effectve as of October 8, 19 0, secton
12 (1), as amended, of the Interna Revenue Code, s hereby repeaed.
Par. 2. y amendng the frst sentence of secton 19.12 -2, as added
by Treasury Decson 5016 and amended by Treasury Decson 5101,
to read as foows:
If the Secretary of the Department concerned makes the requred certfcaton
of necessty, a corporaton s entted, at ts eecton, to a deducton wth respect
to the amortzaton of the ad|usted bass of an emergency facty, such amortza-
ton to be based generay on a perod of 60 months.
Par. 3. y strkng out secton 19.12 -9, as added by Treasury Dec-
son 5016 and amended by Treasury Decsons 50 9 and 510 .
(Ths Treasury decson s ssued under the authorty contaned n
Pubc aw 36 (Seventy-seventh Congress), approved February 6,
19 2, and secton 62 of the Interna Revenue Code, 53 Stat., 32
(26 U. S. C.,62).)
Norman D. Cann,
ctng Commssoner of Interna Re venue.
pproved February 23, 19 2.
ohn L. Suvan,
ctng Secretary of the Treasury.
(FIIpO wth the Dvson of the Federa Regster February 2 , 19 2, 11.35 a. m.)
Secton 19.12 -2: mortzaton deducton 19 2-15-11056
Genera rue. T. D. 513.)
TITL 26 INT RN L R NU . C PT R I, SU C PT R , P RT 19.
INCOM T .
mendng secton 19.12 -2 of Reguatons 103, reatng to the amor-
tzaton of emergency factes.
Treasury Department,
Offce of Commssoner of Interna Revenue.
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
Secton 19.12 -2 of Reguatons 103 Part 19, Code of Federa Regu-
atons, 19 0 Sup. , as added by Treasury Decson 5016, approved
October 23,19 0 C. . 19 0-2,119 , and as amended by Treasury Dec-
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I 19.12 -9.
11
son 510 , approved December 23,19 1 C. . 19 1-2, 131 , and Treas-
ury Decson 5119, approved February 23, 19 2 page 112, ths u-
etn , s amended as foows:
(1) y strkng out the second sentence thereof.
(2) y nsertng after the frst paragraph thereof the foowng new
paragraph :
Wth respect to an emergency facty, no amortzaton deducton sha be
aowed for the ta abe year n whch or wth whch the ta payer eects to
begn the 60-month amortzaton perod uness, wth respect to such facty, a
certfcate of necessty pursuant to secton 12 (f) (1) s made pror to the makng
of such eecton, or pror to December 1, 19 1, whchever Is ater (see secton
12 (f)(3)).
(3) y nsertng mmedatey after the ast paragraph thereof
the foowng new paragraph:
ampe (3). On une 15, 19 1, the Z Corporaton, whch makes ts n-
come ta returns on the caendar year bass, competes the constructon of an
emergency facty at a cost of 110,000. In ts ncome ta return for 19 1,
fed on March 15, 19 2, the Z Corporaton eects to take amortzaton deduc-
tons wth respect to such facty and to begn the 60-month amortzaton
perod wth uy, the month foowng ts competon. No certfcate of neces-
sty wth respect to such facty s made unt pr 10, 19 2, and therefore
no amortzaton deducton wth respect to such facty s aowabe for any
month n the ta abe year 19 1. The Z Corporaton s entted, however, to
take a deducton for deprecaton of such facty for the ta abe year 19 1,
such deducton beng assumed, for the purposes of ths e ampe, to be 2,000.
ccordngy, the ad|usted bass of such facty at the end of anuary. 19 2 (wth-
out regard to the amortzaton deducton for such month), s 108,000 ( 110.-
000 mnus 2,000). For the ta abe year 19 2, the Z Corporaton s, wth
respect to such facty, entted to an amortzaton deducton of 2 ,000, computed
as foows:
Monthy amortzaton deductons:
anuary ( 108,000 - - 5 ) 2,000
February ( 106,000, or 108,000 mnus 2,000, 53) 2. 000
March ( 10 ,000. or 106,000 mnus 2,000, - -52) 2. 000
For the remanng nne months (smary computed) 18,000
Tota amortzaton for 19 2 2 . OO0
Snce the Z Corporaton eected n ts return for 19 1 to take amortzaton
deductons wth respect to such facty and to begn the 60-month amortzaton
perod wth uy, 19 1, t must compute ts amortzaton deductons for the
12 months n the ta abe year 19 2 on the bass of the remanng months of the
estabshed 60-nonth amortzaton perod, as Indcated n the above computa-
ton.
(Ths Treasury decson s ssued under the authortv contaned
n secton 62 of the Interna Revenue Code (53 Stat, 32, 26 U. S. C,
19 0 ed., 62).)
Guy T. everng,
Commssoner of Interna Revenue.
pproved pr 1, 19 2.
ohn L. Su|tvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster pr 3, 19 2, 10.03 a. m.)
Secton 19.12 -9: Rembursement by Unted States
for cost of facty.
INT RN L R NU COD .
Reguatons 103, amended. (See T. D. 5119, page 112.)
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115
19.131-8.
SUPPL M NT C CR DIT G INST T .
S CTION 131. T S OF FOR IGN COUNTRI S ND
POSS SSIONS OF UNIT D ST T S.
Secton 19.131-1: nayss of credt for ta es.
INT RN L R NU COD .
rtsh bocked accounts as reated to credt for rtsh ta es
pad or accrued. (See Mn. 5297, page 8 .)
Secton 19.131-5: Countres whch do or do 19 2-10-11012
not satsfy the smar credt requrement. I. T. 3537
INT RN L R NU COD .
The State of ctora, Commonweath of ustraa, satsfes the
smar credt requrement of secton 131(a)3 of the Interna
Revenue Code.
dvce s requested whether the State of ctora, Commonweath
of ustraa, satsfes the smar credt requrement of secton 131(a)3
of the Interna Revenue Code.
Secton 131(a) of the Interna Revenue Code provdes n part as
foows:
(a) owance of Credt. If the ta payer sgnfes n hs return hs desre to
have the benefts of ths secton, the ta mposed by ths chapter, e cept the ta
mposed under secton 102, sha be credted wth:

(3) en resdent of Unted States. In the case of an aen resdent of
the Unted States, the amount of any such ta es pad or accrued durng the
ta abe year to any foregn country, f the foregn country of whch suc
aen resdent s a ctzen ot sub|ect, n mposng such ta es, aows a smar
credt to ctzens of the Unted States resdng n such country;
Secton 1 S of the ctora Income Ta ( ssessment) ct of
December 21, 1936, provdes n genera that ncome derved by a res-
dent from sources wthout the State of ctora s e empt from ncome
ta where that ncome s not e empt from ncome ta n the country
where t s derved, or where the ta payer s abe for royaty or e port
duty n any country outsde ctora n respect of goods from the sae
of whch the ncome s derved.
It s hed that the State of ctora satsfes the smar credt requre-
ment of secton 131 (a)3 of the Interna Revenue Code. (Cf. I. T. 3331,
C. . 1939-2,130.)
Secton 19.131-8: Lmtatons on credt for 19 2-10-11019
foregn ta es. T. D. 5122
TITL 26 INT RN L R NU . C PT R I, SU C PT R , P RT 19.
INCOM T .
Computaton of mtaton upon the credt for foregn ta es n rea-
ton to e cess profts ta under Chapter 2 . Reguatons 103
amended.
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19.131-8.)
116
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
In order to conform Reguatons 103 Part 19, Tte 26, Code of
Federa Reguatons, 19 0 Sup. , reatng to the ncome ta under the
Interna Revenue Code, to the Revenue ct of 19 1 (Pubc aw 250,
Seventy-seventh Congress), approved September 20,19 1, such regua-
tons are amended as foows:
Secton 19.131-8 s amended by addng at the end thereof the
foowng:
Under the provsons of secton 202, Revenue ct of 19 1, amendng secton
23(c) of the Interna Revenue Code, the e cess profts ta mposed by Subchap-
ter of Chapter 2 s, for years begnnng after December 31, 19 0, aowed as a
deducton n the computaton of net ncome for the purposes of Chapter 1. n
aquot part of such e cess profts ta sha be attrbutabe to the net ncome from
sources wthn each foregn country. The amount so attrbutabe Is that propor-
ton of the tota e cess profts ta whch the e cess profts net ncome from
sources wthn such country bears to the tota e cess profts net Income. In the
determnaton of the mtaton provded n secton 131(b)(1), reatng to the
amount of credt aganst the norma ta , the numerator of the mtaton fracton
sha refect reducton for the amount of the e cess profts ta thus attrbuted
to the net ncome from sources wthn the foregn country.
The operaton of ths method of computng the mtaton fracton may be
ustrated by the foowng e ampe reatng to a domestc corporaton for the
caendar year 19 1:
cess profts credt 100, 000. 00
Net ncome for ta abe year (before deductng e cess
profts ta ):
From sources n country 50, 000.00
From sources n Unted States 80,000. 00
Tota net ncome 130,000.00
Less: Credt for dvdends receved (85 per cent of 10,000 dv-
dends from a domestc corporaton) 8,500.00
Norma ta net Income (before deductng e cess profts ta ) 121,500.00
cess profts ta net ncome:
Net ncome from sources n country 50, 000. 00
Less : d|ustments under secton 711 None.
cess profts net ncome from sources n country 50, 000. 00
Net ncome from sources n Unted States 80,000. 00
Less: Dvdends from domestc corporatons as above 8, 500. 00
71,500.00
Less: d|ustments under secton 711 None.
71, 500. 00
cess profts net Income 121,500,00
Less: cess profts credt pus specfc e empton of 5,000 105. 000. 00
d|usted e cess profts net Income 16, 500. 00
cess profts ta 5, 775. 00
Norma ta net Income (before deductng e cess profts ta ) 121,500.00
Less: cess profts ta 5, 775. 00
Norma ta net Income 115, 725. 00
Norma ta and surta (before foregn ta credt) 35,62 . 75
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117
1 1.
Computaton of foregn ta credt for purposes of norma ta and surta .
Foregn ta pad on country Income 16,000. 00
Net ncome from country ad|usted for ratabe part of e cess profts
ta deducton:
, , 50,000 (e cess
foO.OOO (net ncome profts net ncome
from sources n from country ) 5,775 (tota e -
country before- ce8s rofts ta ) - 7,623. 6
deductng e cess 1 uw u c.
profts ta ) feS9 Pyofts net
ncome)
Norma ta net ncome U5 725- 00
Lmtaton on credt (secton 131(b) (1)) :
7,623. 6
35,62 .75 - 1 , 660. 89
115,725.00
mount aowabe as credt 1 , 660. 39
Computaton of credt for the purposes of e cess profts ta .
Foregn ta pad on country ncome 16,000.00
mount aowed as credt wth respect to ta mposed by Chapter 1_._ 1 , 660. 39
aance avaabe as a credt for purposes of the e cess profts ta 1,339. 61
Lmtaton on credt (sectons 131(b) (1) and 729(d) (1)) :
50,000 (e cess profts net ncome from country )
121,500 (entre e cess profts net ncome) 715 2,376.5
mount aowabe as credt 1, 339. 61
Smary, under secton 131(b)(2), the ta payer s net ncome from sources
wthout the Unted States sha be reduced by that porton of the tota e cess
profts ta whch Is attrbutabe to the net ncome from sources wthout the
Unted States.
(Ths Treasury decson s ssued under the authorty contaned n
secton 131 of the Interna evenue Code (53 Stat., 56,26 U. S. C, 10 0
d., 131) and secton 202 of the Revenue ct of 19 1 (Pubc aw 250,
Seventy-seventh Congress).)
Norman D. Cann,
ctng Commssoner of Interna Revenue.
pproved March 2, 19 2.
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster March 2, 19 2, .53 p. m.)
SUPPL M NT D. R TURNS ND P YM NT OF T .
S CTION 1 1. CONSOLID T D R TURNS OF
R ILRO D CORPOR TIONS.
19 2-11-11026
T. D.5127
TITL 26 INT RN L R NU . C PT R I, SU C PT R , P RT 23.
INCOM T .
Reguatons 10 , reatng to consodated ncome ta returns of
affated raroad and Pan- mercan trade corporatons, amended.
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1 1.1
118
Treasury Department,
Offce of Commssoner of Interna Revenue.
Washngton, D. G.
To Coectors of Interna Revenue and Others Concerned:
Reguatons 10 Part 23, Tte 25, Code of Federa Reguatons,
19 0 Sup. are amended as foows:
Paragraph 1. Secton 23.2 s amended as foows:
( ) y strkng from (b) the ast sentence n the second para-
graph and nsertng n eu thereof the foowng:
The opton to treat such foregn corporaton as a domestc corporaton so that
t may be ncuded n a consodated return must be e ercsed at the tme of
makng the consodated return, and can not be e ercsed at any tme thereafter.
If the eecton s e ercsed to treat such foregn corporaton as a domestc
corporaton, t must be ncuded n the consodated return of the affated
group of whch t s a member for each year thereafter for whch such group
makes or s requred to make a consodated return.
( ) y strkng from (b) the ast sentence n the fourth para-
graph and nsertng n eu thereof the foowng:
corporaton ceases to be a member of an affated group when the members
of the group cease to own drecty at east 95 per cent, or, n the case of Pan-
mercan trade corporatons, the parent corporaton ceases to own drecty 100
per cent, of ts stock.
(C) y changng paragraph (e) to read as foows:
(e) Ta .
The term ta means the ncome ta mposed by the Code, and Incudes
any nterest, penaty, addtona amount, or addton to the ta , payabe n
respect thereof.
(D) y changng paragraph (/) to read (g), and by nsertng n
such paragraph mmedatey precedng the e presson net ncome,
secton 21 the foowng: corporaton surta net ncome,
secton 15 ; .
( ) y nsertng mmedatey after paragraph (e) the foowng:
(f) Consodated return.
The term consodated return means a consodated Income ta return.
Par. 2. Secton 23.13(a) s amended by strkng the perod at the
end, and by nsertng n eu thereof: of the affated group.
Par. 3. Secton 23.1 s amended to read as foows:
Sec. 23.1 . ccountng Perod of an ffated Gboup.
The ta abe year of an affated group whch makes a consodated ncome
ta return sha be the same as the ta abe year of the common parent corpora-
ton ; and, upon havng eected to fe consodated returns, each subsdary cor-
poraton sha, not ater than the cose of the frst consodated ncome ta ta -
abe year endng thereafter, adopt an annua accountng perod, fsca year or
caendar year as the case may be, n conformty wth that of the common parent.
If a change of accountng perod s made by a subsdary n order to conform
wth that of the common parent and f the requrements of secton 19. 8-1,
Reguatons 103, reatng to notce of change, can not otherwse be comped
wth, such notce sha be furnshed at or before the tme of fng the conso-
dated return.
Wth respect to computatons for years nvoved n the change to the con-
sodated bass, see secton 23.32.
Par. . Secton 23.15 s amended by changng paragraphs (b), (c),
and (d) to read, respectvey, (c), ( /), and (e), and by nsertng
mmedatey after paragraph (a) the foowng:
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119
5 1 1.
(6) Labty of a Corporaton n ankruptcy or Recevershp.
If, at the tme of fng a consodated return, one or more, but not a, of the
members of the n fated group are n bankruptcy under the aws of the Unted
States or n recevershp n any court of the Unted States or of any State,
Terrtory, or the Dstrct of Coumba, then the abty under paragraph (a)
of each such member of the group wth respect to the perod covered by such
return sha not e ceed such porton of the consodated ta abty for such
perod as the severa corporatons ncuded n the consodated return may,
sub|ect to the approva of the Commssoner, agree upon, or, n the absence
of such an agreement, an amount equa to ts abty for such year computed
as f a separate return had been fed.
Par. 5. Secton 23.16(a) s amended us foows:
( ) y nsertng mmedatey after the second semcoon n the
thrd sentence the foowng:
notce and demand for payment of ta es w be gven ony to the common
parent, and such notce and demand sha be consdered as a notce and demand
to each such corporaton;
( ) y strkng from the fourth sentence that porton foowng
the semcoon and by nsertng n eu thereof the foowng:
any notce and demand for payment w name each corporaton whch was
a member of the affated group durng any part of such perod (but a faure
to Incude the name of any such corporaton w not affect the vadty of
the notce and demand as to the other corporatons) ; and any dstrant (or
warrant n respect thereof), any evy (or notce n respect thereof), any notce
of a en, or any other proceedng to coect the amount of any assessment,
after the assessment has been made, w name the corporaton from whch
such coecton s to be mado.
Pah. 6. Secton 23.30 s amended as foows:
( ) y changng the headng of paragraph (6) to read: Years
egnnng n 191f.
( ) y strkng the astersk at the end of paragraph (b), and
by nsertng mmedatey after such paragraph the foowng:
(c) Years egnnng fter December SI. 191,0.
In the case of an affated group whch makes, or s requred to make, a
consodated return for any ta abe year begnnng after December 31, 19 0,
the ta abty of each corporaton for the perod durng such year that It
was a member of such group sha be computed upon the consodated norma-ta
net ncome and the consodated corporaton surta net ncome of the group,
determned n accordance wth these reguatons. (See, however, secton 23.15,
reatng to the abty of the members of the group.)
Par. 7. Secton 23.31(a) s amended as foows:
( ) y strkng out the headng and that porton of the paragraph
precedng the numbered subparagraphs, and by nsertng n eu
thereof the foowng:
(a) Defntons Years egnnng Pror to anuary 1,19 1.
(1) In Genera.
In the case of an affated group of corporatons whch makes or s requred
to make a consodated return for any ta abe year begnnng pror to anuary
1,19 1, and e cept as otherwse provded n these reguatons
( ) y changng the subparagraph formery desgnated as (1)
to read as foows:
(1) The consodated net ncome sha be the combned net ncome of the
severa affated corporatons, reduced, n the case of a ta abe year begnnng
In 19 0, by the consodated net operatng oss deducton ;
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1 1.
120
(C) y changng the subparagraph formery desgnated as (2)
to read as foows:
() The consodated ad|usted net Income sha be the consodated net
Income mnus the combned credt of the severa affated corporatons provded
n secton 26(a), reatng to nterest on certan obgatons of the Unted States
and Government corporatons;
(D) y renumberng as ( ) the subparagraph formery desg-
e presson n such subparagraph the foowng: of the severa
affated corporatons havng net ncome, and by nsertng mme-
datey precedng the semcoon at the end of such subparagraph the
foowng:
computed wthout regard to the quafcatons e pressed n paragraph (c) re-
atng to net operatng oss deductons.
( ) y renumberng as ( ) the subparagraph formery desgnated
(10), and by renumberng as (aa) and (ho), respectvey, of nferor
subdvson ( ) the nferor subdvsons formery desgnated (t)
and ().
(F) y renumberng as (), (v), (v), (v), (v), and (v),
respectvey, the subparagraphs formery desgnated as (3), ( ),
Par. 8. Secton 23.31(a ) s amended as foows:
( ) y strkng out the headng and nsertng n eu thereof
the foowng:
(2) Tears egnnng n 19S9.
( ) y changng the subparagraph formery desgnated as (1) to
read as foows:
() The consodated speca cass net ncome sha be the consodated ad|usted
net ncome mnus the consodated credt for dvdends receved;
(C) y renumberng as () and (), respectvey, the subpara-
graphs formery desgnated as (2) and (3).
Par. 9. Secton 23.31 (aaa) s amended as foows:
( ) y strkng out the headng and that porton of the para-
graph precedng the numbered subparagraphs, and by nsertng n
feu thereof the foowng:
(3) Years egnnng n 19. t0.
In the case of an affated group of corporatons whch makes or Is requred
to make a consodated return for ta abe years begnnng after December 31,
1939, and before anuary 1, 19 1, and e cept as otherwse provded n these
reguatons
( ) y changng the subparagraph formery desgnated as (1) to
read as foows:
() The consodated norma-ta net Income sha be the consodated ad-
usted net Income mnus the consodated credt for dvdends receved;
(C) y renumberng as (v) the subparagraph formery desg-
nated as ( ), and by nsertng mmedatey after the second paren-
thetca e presson n such subparagraph the foowng:
of the severa affated corporatons havng net ncome.
(D) y renumberng as () and (), respectvey, the subpara-
graphs formery desgnated as (2) and (3).
nated
second parenthetca
(5), (6), (7), and (8).
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121
( M.
Par. 10. Secton 23.31 s further amended by nsertng mmedatey
after paragraph (a) (3) (v) (C) the foowng:
(6) Defntons Years egnnng fter December 31, 19 0.
In the case of an affated group of corporatons whch makes or s requred
to make a consodated return for any ta abe year begnnng after December 31,
19 0, and e cept as otherwse provded n these reguatons
(1) The consodated net ncome sha be the combned net ncome of the
severa affated corporatons
() Mnus any consodated net operatng oss deducton.
() Pus any consodated net short-term capta gan, and
() Pus or mnus, as the case may be, any consodated net ong-term
capta gan or consodated net ong-term capta oss;
(2) The consodated net short-term capta gan sha be the e cess of the
sum of the short-term capta gans of the severa affated corporatons over the
sum of the short-term capta osses of such corporatons;
(3) The consodated net ong-term capta gan sha be the e cess of the sum
of the ong-term capta gans of the severa affated corporatons over the sum
of the ong-term capta oss of such corporatons;
( ) The consodated net ong-term capta oss sha be the e cess of the sum
of the ong-term capta osses of the severa affated corporatons over the sum
of the ong-term capta gans of such corporatons;
(5) The consodated net operatng oss deducton sha be an amount equa
to the consodated net operatng oss carry-over reduced by the amount, f any,
by whch the consodated net Income (computed wth the e ceptons and mta-
tons provded n secton 122(d)) e ceeds the consodated norma-ta net In-
come (computed wthout any net operatng oss deducton) ;
(6) The consodated net operatng oss carry-over sha be the sum of
() The amount of the consodated net operatng oss, f any, for the
frst precedng ta abe year,
(II) The amount of the consodated net operatng oss, f any, for the
second precedng ta abe year reduced by the e cess, f any, of the conso-
dated net ncome (computed wth the e ceptons and mtatons provded n
secton 122(d)) for the frst precedng ta abe year over the consodated
net operatng oss for the thrd precedng ta abe year, and, wth respect
to net operatng osses sustaned by a corporaton for ta abe years pror
to the frst ta abe year n respect of whch ts ncome Is ncuded n the
consodated return
(III) The amount of the net operatng oss, If any, sustaned by such
corporaton for the frst precedng ta abe year, and
(v) The amount of the net operatng oss, f any, sustaned by such
corporaton for the second precedng tn abe year reduced by the e cess,
f any, of the net ncome of such corporaton for the frst precedng ta abe
year or, f the ncome of such corporaton s Incuded In the consodated
return for the frst precedng ta abe year, ether the net ncome of such
corporaton ncreased by the separate net short-term and ong-term capta
gans of such corporaton or the consodated net ncome for such year
(computed n ether case wth the e ceptons and mtatons provded n
secton 122(d)), whchever s the esser, over the net operatng oss of
such corporaton for the thrd precedng ta abe year;
(7) The consodated net operatng oss sha be an amount equa to the
e cess of the combned net operatng osses of the severa affated corpora-
tons havng net operatng osses (computed sub|ect to the e ceptons and
mtatons provded n secton 122(d)) over the sum of
(I) The combned net ncome of the severa affated corporatons hav-
ng net ncome (ad|usted wth respect to the e ceptons and mtatons
provded n secton 122(d) n connecton wth the computaton of net
operatng osses), and
() The consodated net short-term capta gan and the consodated
net ong-term capta gan;
(8) The consodated norma-ta net ncome sha be the consodated
ad|usted net ncome mnus the consodated credt for dvdends receved;
(9) The consodated ad|usted net ncome sha be the consodated net
ncome mnus the consodated credt reatng to nterest on certan obgatons
of the Unted States and Government corporatons;
7 918 -
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1 1.1
122
(10) The consodated credt for dvdends receved sha be an amount equa
to 85 per cent of the aggregate dvdends, of the cass wth respect to whch
credt s aowed by secton 26(b), receved by the severa affated corpora-
tons, but not n e cess of 85 per cent of the consodated ad|usted net ncome;
(11) The consodated credt reatng to nterest on certan obgatons of
the Unted States and Government corporatons sha be an amount equa to
the aggregate of the nterest, of the cass wth respect to whch credt Is
aowed by secton 26(a), receved by the severa affated corporatons;
(12) The consodated corporaton surta net ncome sha be the consodated
net ncome mnus the consodated credt for dvdends receved, computed by
mtng such credt to 85 per cent of the consodated net Income In eu of 85 per
cent of the consodated ad|usted net Income;
(13) The consodated dvdends pad credt sha be the sum of
(1) The consodated basc surta credt, and
() The consodated dvdend carry-over;
(1 ) The consodated basc surta credt sha be the sum of
() The aggregate amount of dvdends pad by the severa affated
corporatons durng the ta abe year,
() The combned consent dvdends credts of the severa affated
corporatons provded n secton 28, and
() The consodated net operatng oss credt;
(15) The consodated dvdend carry-over sha be the sum of
() The amount, If any, by whch the consodated basc surta credt for
the frst precedng ta abe year e ceeds the consodated ad|usted net ncome
for such year, and
() The amount of the consodated basc surta credt for the second
precedng ta abe year reduced by the consodated ad|usted net ncome for
such year, and further reduced by the amount, f any, by whch the con-
sodated ad|usted net ncome for the frst precedng ta abe year e ceeds
the sum of
( ) The consodated basc surta credt for such year, and
( ) The e cess, f any, of the consodated basc surta credt for
the thrd precedng ta abe year over the consodated ad|usted net Income
for such year,
and, wth respect to the unused basc surta credt of a corporaton for ta -
abe years pror to the frst ta abe year n respect of whch ts ncome s
ncuded n the consodated return
() The amount, f any, by whch the basc surta credt of such cor-
poraton for the frst precedng ta abe year e ceeds the ad|usted net ncome
of such corporaton for such year, and
(v) The amount of the basc surta credt of such corporaton for the
second precedng ta abe year reduced by the ad|usted net ncome of such
corporaton for such year, and further reduced by
( ) The e cess, f any, of the ad|usted net ncome of such corporaton
for the frst precedng ta abe year over the sum of
(aa) The basc surta credt of such corporaton for such year, and
(66) The amount, f any, by whch the basc surta credt of such
corporaton for the thrd precedng ta abe year e ceeds the ad|usted
net ncome of such corporaton for such year, or
( ) If the ncome of such corporaton Is ncuded n the consodated
return for the frst precedng ta abe year, the esser of the amount of
the e cess computed under ( ) or the e cess, f any, of the consodated
ad|usted net ncome for the frst precedng ta abe year over the sum of
(aa) The consodated basc surta credt for such year, and
(65) The amount, f any, by whch the basc surta credt of
such corporaton for the thrd precedng ta abe year e ceeds the
ad|usted net ncome of such corporaton for such year;
(16) The consodated net operatng oss credt sha be an amount equa to
the consodated net operatng oss, computed for the purposes of the net oper-
atng oss credt, for the precedng ta abe year, but not n e cess of the con-
sodated ad|usted net Income for the ta abe year;
(17) The consodated net operatng oss, computed for the purposes of the
net operatng oss credt, sha be the sum of
() The e cess of the combned net operatng osses of the severa affated
corporatons havng net operatng osses, computed sub|ect to the e ceptons
and mtatons provded In secton 26(c) (2), over the combned net ncome,
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123
f M.
ad|usted wth respect to the e ceptons and mtatons provded In such
subsecton n connecton wth the computaton of net operatng osses, of
the severa affated corporatons havng net ncome, and
() Wth respect to the net operatng oss sustaned by a corporaton for
the ta abe year pror to the frst ta abe year n respect of whch ts ncome
s ncuded n the consodated return, the amount of such net operatng oss
for such pror ta abe year, sub|ect to the e ceptons and mtatons pro-
vded n secton 26(c)(2), n an amount not n e cess of the ad|usted net
ncome of such corporaton for the ta abe year computed wthout regard
to the quafcatons e pressed n (d)(1) () and ().
Par. 11. The secton formery desgnated 23.31(6) s amended as
foows:
( ) y changng the headng thereof to read as foows:
(c) Computatons Years egnnng Pror to anuary 1, 19 1.
( ) y strkng the perod at the end of the frst sentence of the
frst paragraph, and by nsertng n eu thereof the foowng:
, and wthout takng Into account any net operatng oss deducton.
(C) y strkng from the second paragraph thereof the foowng:
the speca cass net ncome, the norma-ta net ncome,
(D) y strkng from the second paragraph thereof the e pres-
son, secton 22(a) and nsertng n eu thereof: secton 122(a).
( ) y strkng the word and from the e presson, and
the credt provded by secton 27(a)( ) reatng to amounts used
or rrevocaby set asde to pay or to retre ndebtedness, appearng
n that porton of the second paragraph precedng the numbered
subparagraphs, and by nsertng mmedatey after such e presson
the foowng:
and gans or osses from saes or e changes of capta assets,
(F) y strkng from subparagraph (6) the word and ; by
strkng the perod at the end of subparagraph (7) and nsertng a
semcoon and the word and n eu thereof; and by nsertng the
foowng new subparagraph:
(8) In the computaton of gans-or osses from saes or e changes of cap-
ta assets, there sha be emnated any gans or osses arsng n ntercom-
pany transactons.
Par. 12. Secton 23.31 s further amended by renumberng as (e)
and (g), respectvey, the paragraphs formery desgnated (c) and
(e), and by nsertng mmedatey precedng the paragraph renum-
bered (e) the foowng:
( t) Computatons Years egnnng fter December SI, 19 /0.
In the case of affated corporatons whch make, or are requred to make,
a consodated return for a ta abe year begnnng after December 31, 19 0,
and e cept as otherwse provded n these reguatons
(1) The net ncome of such corporatons sha be computed n accordance
wth the provsons coverng the determnaton of net ncome of separate cor-
poratons, e cept
(1) There sha be emnated unreazed profts and osses n transac-
tons between members of the affated group and dvdend dstrbutons
from one member of the group to another member of the group (referred
to n these reguatons as Intercompany transactons),
() No net operatng oss deducton sha be taken nto account, and
() No capta gans or osses sha be taken nto account.
Intercompany profts and osses whch have been reazed by the group through
fna transactons wth persons other than members of the group, and Inter-
company transactons whch do not affect the consodated ta abe net Income,
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12
sha not be emnated. s used In ths paragraph, the term net Income
ncudes the case n whch the aowabe deductons of a member (not Incudng
any net operatng oss deducton) e ceed ts gross ncome.
(2) The ad|usted net ncome, the dvdends receved of a cass wth respect
to whch credt s aowed by secton 26(b), the nterest receved of a cass
wth respect to whch credt s aowed by secton 26(a), the short-term capta
gans and osses and the ong-term capta gans and osses as defned n secton
117(a), the net operatng oss as defned n secton 26(c) (2) for the purpose of the
net operatng oss credt, the net operatng oss as defned n secton 122(a) for
the purpose of the net operatng oss deducton, the amount of dvdends pad,
and the consent dvdends credt aowed pursuant to secton 28 sha be computed
and determned n the.case of each affated corporaton n the same manner and
sub|ect to the same condtons as f a separate return were fed, e cept
() The net ncome used n any such computaton sha be the net ncome
of the corporaton determned n accordance wth the provsons of ths
secton;
() In the computaton of the dvdends receved, there sha be e cuded
a dvdends receved from other members of the affated group;
() In the computaton of short-term capta gans and osses and ong-
term capta gans and osses, there sha be emnated any gans or osses
arsng n ntercompany transactons;
(v) In the computaton of the net operatng oss as defned, ether n
secton 26(c) (2) or n secton 122(a), the provsons of ths secton pertanng
to the determnaton of net ncome sha appy;
(v) In the computaton of dvdends pad, there sha be e cuded a
dvdends pad by one member of the group to another; and
(v) In the computaton of the consent dvdends credt, no amounts
sha be ncuded wth respect to consents gven by other members of the
group.
(3) In no case sha there be ncuded n the consodated net operatng oss
carry-over under (6) (6) () and (v) of ths secton (reatng to net operatng
osses sustaned by a corporaton n years pror to the frst ta abe year n
respect of whch ts ncome s ncuded n the consodated return) an amount
n e cess of the net ncome of such corporaton (computed wth the e ceptons
and mtatons provded n secton 122(d)) ncuded n the computaton of the
consodated net Income for the ta abe year ncreased by the separate net short-
term and ong-term capta gans of such corporaton.
( ) If a porton of the consodated net operatng oss carry-over arses pur-
suant to the provsons of (6) (6) () or (v) of ths secton (reatng to osses
sustaned by a corporaton pror to the frst ta abe year n respect of whch
Its ncome s Incuded n the consodated return), the consodated net operatng
oss deducton sha not be ess than the amount of such porton reduced by
the amount, f any, by whch the net ncome of such corporaton (computed wth
the e ceptons and mtatons provded n secton 122(d)) e ceeds the norma-ta
net ncome of such corporaton (computed wthout any net operatng oss deduc-
ton but takng nto account any net ong-term capta oss), or, n the case of
two or more such corporatons, the sum of such portons so reduced.
(5) If, In the computaton of the consodated net operatng oss carry-over
for the second consodated return perod In respect of whch the ncome of a
corporaton s ncuded n the consodated returns of the group, there s nvoved
the net operatng oss separatey sustaned by such corporaton for the second
precedng ta abe year together wth a consodated net operatng oss for the
second precedng ta abe year, or f, for the second consodated return perod
n respect of whch the ncome of two or more members of the affated group
s ncuded n the consodated returns of the group, there are nvoved the net
operatng osses separatey sustaned by such corporatons for the second preced-
ng ta abe year, no porton of the consodated net ncome for the frst precedng
ta abe year sha be taken nto account more than once In gvng effect to the
provsons of (6) (6) () and (v) of ths secton (reatng to the computaton
of that part of the consodated net operatng oss carry-over attrbutabe to
osses of the second precedng ta abe year).
(6) If, n the computaton of the consodated dvdend carry-over for the
second consodated return perod n respect of whch the ncome of a corporaton
Is ncuded n the consodated return of the group, there s nvoved a separate
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125
t ).
unused. basc surta credt of such corporaton for the second precedng ta abe
year together wth a consodated unused basc surta credt for the second
precedng ta abe year, or f, for the second consodated return perod n respect
of whch the ncome of two or more members of the affated group s ncuded
n the consodated return of the group, there are nvoved the separate unused
basc surta credts of such corporatons for the second precedng ta abe year,
no porton of the e cess of the consodated ad|usted net ncome over the con-
sodated basc surta credt for the frst precedng ta abe year sha be taken
nto account more than once n gvng effect to the provsons of (6) (15) () and
(v) of ths secton reatng to the computaton of that part of the dvdend
carry-over attrbutabe to the unused basc surta credt of the second precedng
ta abe year.
Par. 13. Secton 23.31 s further amended by strkng out the para-
graph formery desgnated as (d) and nsertng n eu thereof the
(/) Net Operatng Loss Deducton, Net Operatng Loss Credt, and Dvdend
Carry-over fter Consodated eturn Perod.
The consodated net operatng oss (whether computed for the purpose of the
deducton or the credt) or the unused consodated basc surta credt of an
affated group for any consodated return perod of the group sha be used n
computng the net operatng oss deducton, the net operatng oss credt, or the
dvdend carry-over, as the case may be, n the return of the common parent
corporaton (or the consodated net operatng oss deducton, the consodated net
operatng oss credt, or the consodated dvdend carry-over n the consodated
return of another affated group of whch such common parent becomes a mem-
ber) for a ta abe year subsequent to the ast consodated return erod of the
group n the same manner, to the same e tent, upon the same condtons, and
sub|ect to the same mtatons as f, durng the ta abe year n whch such oss
or such unused basc surta credt orgnaed and contnung to the date of the
termnaton of the group, the group had been a snge corporaton, the common
parent corporaton; and no net operatng oss or unused basc surta credt
attrbutabe to a consodated return perod of a group sha be used n computng
the net operatng oss deducton, the net operatng oss credt, or the dvdend
carry-over of a subsdary (or the consodated net operatng oss deducton, the
consodated net operatng oss credt, or the consodated dvdend carry-over
of another affated group of whch such subsdary becomes a member) for any
ta abe year subsequent to the ast consodated return perod of the group. No
part of any unused basc surta credt of a corporaton for a year pror to the
frst consodated return perod of the affated group of whch such corporaton
becomes a subsdary sha be used In computng the dvdend carry-over of such
corporaton (or the consodated dvdend carry-over of another affated group
of whch such subsdary becomes a member) for any ta abe year subsequent to
the ast consodated return perod, but any part of such unused basc surta credt
whch, e cept for ths restrcton, mght be so used sha be treated as attrbutabe
to the common parent corporaton of the group for a year n whch such common
parent had no ad|usted net ncome and no other basc surta credt. No part of
any net operatng oss sustaned by a corporaton pror to the frst consodated
return perod of the affated group of whch such corporaton becomes a sub-
sdary sha be used n computng the net operatng oss deducton of such cor-
poraton (or the consodated net operatng oss deducton of another affated
group of whch such corporaton becomes a member) for any ta abe year sub-
sequent to the ast consodated return perod, but any part of such net operatng
oss whch, e cept for ths restrcton, mght be so used sha be treated as havng
been sustaned by the common parent corporaton of the group.
Par. 1 . Secton 23.33 s amended as foows:
( ) y changng the tte thereof to read: Gan or Loss From
Sae of Stock, or onds or Other Obgatons.
( ) y strkng out the e presson, any bond or obgaton ssued
by another corporaton and nsertng n eu thereof the foowng:
any bond or other obgaton ssued or ncurred by another
corporaton.
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126
(C) y renumberng as (a) the paragraph formery desgnated
(1), and by strkng out the frst parenthetca e presson appearng
theren and nsertng n eu thereof the foowng:
(by sae, or n compete or parta qudaton not Invovng cash n an amount n
e cess of the ad|usted bass of both the stock and the bonds and other ndebted-
ness qudated, or otherwse).
(D) y renumberng as (b) the Daraerar|h formery desgnated (2).
( ) y renumberng as (c) the paragraph formery desgnated
(3), and by strkng from the parenthetca e presson appearng
theren the ast three words and nsertng n eu thereof the foow-
ng: stock, or bonds or other obgatons.
Par. 15. Secton 23.3 s amended as foows:
( ) y strkng from paragraph (b) the parenthetca e presson
and by nsertng n eu thereof: ut see secton 23.38(6).
( ) y strkng from paragraph (c)(1) the ast parenthetca
e presson and by nsertng n eu thereof the foowng:
, but wthout regard to any ad|ustment under the ast sentence of secton
113(a) (11) wth respect to osses of the ssung corporaton sustaned by such
corporaton after t became a member of the affated group and ncuded n a
consodated ncome ta return of the group.
(C) y strkng paragraph (e) and nsertng n eu thereof the
foowng:
(e) Defnton of Loss, Consodated Loss, and Net Loss or Net
Operatng Loss.
s used n ths secton the term oss means the e cess over the gross
ncome of the ssung corporaton of the sum of Its aowabe deductons (not
ncudng any net oss or net operatng oss deducton) pus the proportonate
part propery attrbutabe to such corporaton of the credts reatng to nterest
on certan Government obgatons and dvdends receved aowabe n com-
putng consodated norma-ta net ncome, the consodated speca cass net
ncome, or consodated net Income sub|ect to ta ; the term consodated oss
means the e cess of the sum of the osses, separatey computed, over the sum
of the norma-ta net Income, the speca cass net ncome, or the net ncome
sub|ect to ta , separatey computed, of the severa members of the affated
group, determned n accordance wth the provsons of the Code, or the Revenue
ct, and pursuant to the provsons of consodated returns reguatons, appcabe
to the perod; and the term net oss or net operatng oss means the net
oss or net operatng oss, as the case may be, determned n accordance wth
the provsons of the Code, or the Revenue ct, and pursuant to the provsons
of consodated returns reguatons, appcabe to the perod.
Par. 16. Secton 23.35 s amended to read as foows:
Sec. 23.35. Sae or onds ob Other Obgatons ass foe Determnng Gan om
Loss.
In the case of a sae or other dsposton by a corporaton, whch s (or has
been) a member of an affated group whch makes (or has made) a conso-
dated ncome ta return for the ta abe year 1929 or any subsequent ta abe
year, of bonds or other obgatons ssued or ncurred by another member of
such group (whether or not ssued or Incurred whe It was a member of the
group and whether ssued or ncurred before, durng, or after the ta abe year
1929), the bass of each bond or obgaton, for determnng the gan or oss upon
such sae or other dsposton, sha be determned n accordance wth the Code
(see, partcuary, secton 113), but the amount of any oss otherwse aowabe
sha be decreased by the e cess (f any) of the aggregate of the deductons
computed under paragraph (c) (2) of secton 23.3 over the sum of the aggre-
gate bases of the stock of the debtor corporaton as computed under paragraph
(c)(1) or ( t), as the case may be, hed by the members of the group. (See,
aso, secton 23. 0, reatng to dsaowance of oss upon ntercompany bad
debts.)
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127
u.
Par. 17. Secton 23.36 s amended by changng the tte thereof to
read: Lmtaton on owabe Losses on Sae of Stock, or onds
or Other Obgatons.
Par. 18. Secton 23.37(a) s amended by strkng out the frst para-
graph and nsertng n eu thereof the foowng:
Gan or oss sha not be recognzed upon a dstrbuton durng a consodated
return perod, by a member of an affated group to another member of such
group, n canceaton or redempton of a or any porton of ts stock, e cept
(1) Where such dstrbuton s n compete qudaton and redempton of
a of ts stock (whether n one dstrbuton or a seres) and of ts bonds and
other ndebtedness, f any, fas wthout the provsons of secton 112(b) (6), and
s the resut of a bona tde termnaton of the busness and operatons of such
member of the group, In whch case It sha be treated as a sae of the stock,
or bonds or other ndebtedness, the ad|ustments specfed In sectons 23.3
and 23.35 w be made, and secton 23.38 w be appcabe; or
(2) Where such a dstrbuton wthout the provsons of secton 112(b) (6) s one
made n cash In an amount n e cess of the ad|usted bass of the stock, and
bonds and other ndebtedness, n whch case gan sha be recognzed to the
e tent of such e cess.
Par. 19. Secton 23.38 (c) s amended as foows:
( ) y strkng out that porton of subparagraph (3) precedng
the numbered subdvsons and by nsertng n eu thereof the
foowng:
Where property s acqured durng a ta abe year begnnng after December
31, 193S, upon a dstrbuton (not a compete qudaton wthn the provsons
of secton 112(b)(6)) n whch gan or oss to the dstrbutee s not recognzed
as provded In secton 23.37(a), the bass of such property sha be the same as
the bass (determned In accordance wth sectons 111 to 115, ncusve, and
sectons 23.3 and 23.35) of the stock and the bonds and other obgatons e -
changed therefor, ad|usted
( ) y renumberng as (3) (), (), and (), respectvey, the
subparagraphs formery desgnated (3) ( ), ( ),and (C).
(C) y renumberng as ( ) (), (), (), and (v), respectvey,
the subparagraphs formery desgnated as ( ) ( ), ( ), (C), and
(D).
Par. 20. Secton 23.39 s amended as foows:
( ) y renumberng as subparagraph (1) the paragraph for-
mery desgnated (a), and by nsertng mmedatey precedng suc
subparagraph the foowng new paragraph headng:
(a) Years egnnng Pror to anuary 1,19 1.
( ) y renumberng as subparagraph (2) the paragraph formery
desgnated (b), and by strkng the astersk at the end and nsertng
n eu thereof the foowng:
(6) Years egnnng fter December SI, 19 0.
(1) Consodated Return for Frst Year of ffaton.
If the ncome of an affated corporaton s ncuded n a consodated return
for the perod Immedatey foowng the date upon whch such corporaton became
a member of the affated group, the vaue of ts openng Inventory to be used
n computng the consodated net ncome sha be the proper vaue of the cosng
nventory used n computng ts net ncome for the precedng ta abe year.
(2) Consodated Return fter Separate Return by ffates.
If a corporaton whch s a member of the affated group for the frst conso-
dated return perod was a member of the group In the precedng ta abe year,
the vaue of ts openng nventory to be used In computng the consodated net
ncome for the frst consodated return perod sha be the proper vaue of the
cosng nventory used n computng ts net ncome for the precedng ta abe
year decreased n the amount of profts or Increased n the amount of osses.
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128
refected n such Inventory whch arose n transactons between members of the
affated group and whch have not been reazed by the group through fna
transactons wth persons other than members of the group.
(3) Separate Returns Made fter Consodated Returns.
If a corporaton whch was a member of an affated group n a consodated
return perod makes or s requred to make a separate return for the succeedng
ta abe year, the vaue of Its openng nventory to be used n computng ts net
ncome for such succeedng ta abe year sha be the proper vaue of ts cosng
nventory used n computng consodated net ncome for the ast consodated
return perod.
Par. 21. Secton 23. 0(a) s amended by strkng at the end thereof
the words, any other member of the group. and by nsertng n
eu thereof the foowng:
any other corporaton whch was a member of the group as of the ast day of
the ta abe year or whch was qudated by the group durng such year e cept
as a oss n connecton wth a qudaton of such other member n whch osses
are recognzed pursuant to secton 23.37(a).
Par. 22. Secton 23. 1(6) s amended by nsertng mmedatey pre-
cedng the words n determnng the gan or oss to the ssung com-
pany the foowng:
and n a transacton other than a dstrbuton n a qudaton n whch gan or
oss to the dstrbutee s recognzed pursuant to secton 23.37(a),
Par. 23. Secton 23. 2 s amended as foows:
( ) y nsertng the foowng new paragraph headng mmed-
atey after the secton headng:
(a) Years egnnng Pror to anuary 1,19 1.
( ) y strkng and 117(d) and nsertng n eu thereof the
foowng: 117 (d) and (e), and 122 (d).
(C) y nsertng mmedatey after the words consodated re-
turn perod the foowng: begnnng pror to anuary 1,19 1.
(D) y strkng the astersk at the end and nsertng n eu thereof
the foowng:
(6) Years egnnng fter December 31, 19 0.
The provsons of sectons 23 (g) and (k), 117 (d) and e), and 122(d) wth
respect to gans and osses from saes or e changes of capta assets sha be
apped, n respect of such gans and osses sustaned durng a consodated return
perod begnnng after December 31, 19 0, as f the affated group were the
ta payer.
Wth respect to a net short-term capta oss sustaned by a corporaton n a
year pror to the frst consodated return perod n respect of whch the ncome
of such corporaton s ncuded n the consodated return, such oss (n an amount
not n e cess of the net ncome of such corporaton for such year or n e cess
of the net short-term capta gan of such corporaton for the frst consodated
return perod) sha, for the purposes of secton 117(e), reatng to a net
short-term capta oss carry-over, be treated as f such net short-term capta
oss had been sustaned by the affated group.
consodated net short-term capta oss sustaned by the affated group
durng the ast consodated return perod of the group (n an amount not n
e cess of the consodated net ncome for such year) sha be treated n the
succeedng ta abe year, sub|ect to the e cepton provded n secton 117(e), as
a short-term capta oss of the common parent corporaton. No porton of any
consodated net short-term capta oss sustaned durng a consodated return
perod of an affated group sha be used n computng short-term capta osses
of a subsdary for any subsequent ta abe year.
Par. 2 . Secton 23. 3 s amended as foows:
( ) y nsertng the foowng new paragraph headng mmed-
atey after the secton headng:
(a) Years egnnng Pror to anuary 1,19 1-
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129
t 19.1 3-1.
( ) y strkng from that porton of the secton precedng the
numbered subparagraphs the words the consodated return perod
and by nsertng n eu thereof the foowng: a consodated return
perod begnnng pror to anuary 1,19 1.
(C) y strkng from subparagraphs (1) and (2) the e presson
secton 23.31 (b) and by nsertng n each case n eu thereof the
foowng: secton 23.31 (c).
(D) y strkng the astersk at the end and nsertng n eu thereof
the foowng:
(6) Years egnnng fter December SI, 19 0.
The credt aowed to an affated group for ta es pad or accrued durng a
consodated return perod begnnng after December 31, 19 0, to any foregn
country or to any possesson of the Unted States (under secton 131) sha be
computed and aowed as f the affated group were the ta payer.
(Ths Treasury decson s ssued under the authorty contaned n
secton 1 1 of the Interna evenue Code (53 Stat., 58), as amended
by secton 210 of the Revenue ct of 1939 (53 Stat., 8(56), secton 152
of the Interna Revenue Code (53 Stat., 880), and sectons 10 and
118 of the Revenue ct of 19 1 (Pubc aw 250, Seventy-seventh
Congress).)
Norman D. Cann,
ctng Commssoner of Interna Revenue.
pproved March 5, 19 2.
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster March 6, 19 2, p. m.)
S CTION 1 3. WIT OLDING OF T
T SOURC .
Secton 19.1 3-1: Wthhodng ta at source. 19 2-9-11005
( so Secton 1 ; Secton 19.1 -1.) I. T. 3535
INT RN L R NU COD .
Wthhodng of ta at the source under sectons 1 3(b) and 1
of the Interna Revenue Code, as amended, s requred to be made
at the rates n effect on the date the dvdend check s orgnay
Issued, rrespectve of whether the check s ater returned because
of defectve address or a new check s subsequenty ssued to
repace the orgna whch has been ost.
dvce s requested as to the rates of ta requred to be wthhed
at the source under sectons 1 3(b) and 1 of the Interna Revenue
Code, as amended, n cases where t s necessary to rema or ressue a
dvdend check after a change n the wthhodng rate has become
effectve. These cases fa, generay, under the foowng categores:
(1) Checks returned by the post offce because of defectve or
ncorrect addresses.
(2) Dvdends payabe to stockhoders whose funds are bocked
under the ecutve Order of the Presdent.
(3) Where orgna checks are ost and repacement checks have to
be ssued.
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19.162-1.
130
Payor corporatons and ther dvdend dsbursng agents w be
hed abe for the wthhodng of ta at the rates n effect on the
date the dvdend check s frst drawn, rrespectve of whether such
check s ater returned by the posta authortes because of defectve
or ncorrect address, or whether a new check s subsequenty ssued
to repace the orgna whch has been ost. ccordngy, n these
types of cases, annua wthhodng return, Form 10 2, must be fed
for the year n whch the dvdend check was orgnay ssued to
report the ta whch s requred to be deducted and wthhed at that
tme under secton 1 3(b) or secton 1 of the Interna evenue
Code, as amended.
S CTION 1 . P YM NT OF CORPOR TION
INCOM T T SOURC .
Secton 19.1 -1: Wthhodng n the case of non-
resdent foegn corporatons.
INT RN L R NU COD .
Dvdend checks returned or ost after change of ta rate. (See
L T. 3535, page 129.)
SUPPL M NT . ST T S ND TRUSTS.
S CTION 162. N T INCOM .
Secton 19.162-1: Income of estates and 19 2-23-11117
trusts. I. T. 3556
INT RN L R NU COD .
The fng of a speca bond by an e ecutor or admnstrator n
the Dstrct of Coumba does not, n Itsef, have the effect of term-
natng admnstraton of the estate for Federa ncqme ta purposes
where the e ecutor or admnstrator s not the soe bentfcary of
the estate. The fna dstrbuton of the assets of the estate to the
benefcary (or benefcares) determnes the cosng of admnstra-
ton of the estate wthn the meanng of secton 162(c) of the Interna
Revenue Code and secton 19.162-1 of Reguatons 103.
I. T. 2925 (C. . I -2, 1 8 (1935)) dstngushed.
dvce s requested whether I. T. 2925 (C. . I -2, 1 8 (1935))
s appcabe to a case n whch a speca bond s fed n the Dstrct
of Coumba by an e ecutor or admnstrator who s not the soe
benefcary of the estate.
I. T. 2925, supra, deas wth a case n whch the soe benefcary
of the estate of a decedent who ded n March, 1935, was aso e ecutor
of the estate, and a speca bond was fed by the e ecutor n pr,
1935, u: der secton 26 of the Code of Law for the Dstrct of Coumba
(secto 26 of the ct approved March 3, 1901, 31 Stat., 1189; Tte
29, sect on 133, of the 1929 Code of the Dstrct of Coumba). That
secton (now codfed as Tte 20, secton 303, of the 19 0 Code of the
Dstrct of Coumba) provdes as foows:
Speca bond. If the e ecutor s the resduary egatee of the persona estate
of the testator, or provded the resduary egatee of fu age sha notfy hs
consent to the court, he may, nstead of the bond prescrbed as aforesad, gve
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131
19.162-1.
bond wth securty approved by the court, and n a penaty prescrbed by the
court, condtoned to pay a the debts and |ust cams aganst the testator, and
a damages whch sha bu recovered aganst hm as e ecutor, and a egaces
bequeathed by the w, n whch case he sha not be requred to fe any
Inventory or render any account. nd f such bond be gven by the e ecutor,
he sha be answerabe for the fu amount of a debts, cams, and damages
that may be recovered aganst hm as e ecutor as f he were sued In hs own
rght, and any egatee may recover the fu amount of hs egacy n a sut on the
e ecutor s bond or n equty, and the gvng of the bond sha be consdered an
assent to the egacy: Provded, That the surety or suretes In sad bond sha not
be abe for a greater amount than the penaty thereof.
In vew of the fact that the same ndvdua was the soe benefcary
and e ecutor of the estate n the case on whch I. T. 2925, supra, was
based, and that upon the fng of hs speca bond and ts approva
by the court n pr, 1935, he, as e ecutor, became answerabe for the
fu amount of a debts, cams, and damages that mght be recov-
ered aganst hm as e ecutor as f he were sued n hs own rght and
was reeved from returnng an nventory and from fng accounts,
t was hed that the approva and acceptance of hs speca bond by
th| court had the effect of a dstrbuton to hm of the entre estate,
sub|ect to hs persona abty for the decedent s debts and the |ust
cams aganst the decedent s estate. It was aso hed that the perod
of admnstraton or settement of the estate was cosed upon the fng
of the speca bond and ts approva by the court, and that the entre
estate, ncudng the ncome thereof from the date of death, was
dstrbuted to the e ecutor as the soe benefcary durng the estate s
ta abe year 1935. It was further hed that the entre ncome of the
estate was ta abe to the soe benefcary, snce secton 162(c) of the
Revenue ct of 193 provdes that n the case of ncome receved by
estates of deceased persons durng the perod of admnstraton or
settement the amount of the ncome of te estate for ts ta abe year
whch s propery pad or credted durng such year to any egatee,
her or benefcary sha be aowed as a deducton n computng the
net ncome of the estate and sha be ncuded n computng the net
ncome of the egatee, her, or benefcary.
Secton 275 of the Code of Law for the Dstrct of Coumba (sec-
ton 275 of the ct approved March 3,1901,31 Stat., 1189, as amended
bv the ct approved une 30, 1902, 32 Stat., 528; Tte 29, secton
103, of the Dstrct of Coumba Code, 1929 edton; Tte 20, secton
203, of the Dstrct of Coumba Code, 19 0 edton), whch provdes
for the fng of speca bonds by admnstrators of estates, s smar
to secton 20 of the Code of Law for the Dstrct of Coumba, supra,
provdng for the fng of speca bonds by e ecutors of estates.
The courts of the Dstrct of Coumba have not passed on the
queston whether the fng of such a speca bond by an e ecutor or
admnstrator n the Dstrct of Coumba has the effect, n and of
tsef, of cosng the admnstraton of the estate on the date of e ecu-
ton of the bond, or whether, despte the gvng of such a bond,
there s nevertheess a perod of admnstraton (durng whch the
estate must be recognzed as a ta abe entty for Federa ncome ta
purposes) foowng the fng of the bond. though some confct
e sts n other |ursdctons where, by statute, speca bonds may be
fed, the neary unanmous vew appears to be that the fng of such
a bond does not accompsh the cosng of the estate. (See Lafferty v.
Peopes Savngs ank, 76 Mch., 35, 3 N. W., 3 ; Thompson v. Pope s
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19.212-2.
132
state, 77 Neb., 338, 109 N. W., 98; Pym v. Pym, 118 Ws., 662, 96
N. W., 29; reamer v. reamer, 52 an., 597, 35 Pac, 21 .)
In reamer v. reamer, supra, the court made the foowng
statement:
There has been some dscusson upon the much-controverted queston of
whether the gvng of such a speca bond vested the property and assets of the
estate n the resduary egatee, and cosed the admnstraton of the estate.
Upon ths queston the authortes are not unform. (Lafery v. ank, 70 Mch.,
210, 38 N. W., 221; 1 Woerner, dm r, 3 .) The authortes strongy
sustan the vew that an acton upon the bond s not the ony remedy of credtors
or egatees, and that the gvng of such a bond does not cose the admnstraton,
nor whoy deprve the probate court of |ursdcton over the e ecutor and
the estate.
In vew of what appears to be the neary unanmous opnon of the
courts of other |ursdctons n smar cases, t s hed that the fng
of a speca bond by an e ecutor or admnstrator n the Dstrct of
Coumba does not, n tsef, have the effect of termnatng admns-
traton of the estate for Federa ncome ta purposes where the
e ecutor or admnstrator s not the soe benefcary of the estate.
The fna dstrbuton of the assets of the estate to the benefcary (or
benefcares) determnes the cosng of admnstraton of the estate
wthn the meanng of secton 162(c) of the Interna Revenue Code
and secton 19.162-1 of Reguatons 103.
The case consdered n I. T. 2925, supra, consttutes an e cepton
to the genera rue above ad down. In that case the e ecutor was
aso the soe benefcary of the estate, and there was no necessty for
a fna dstrbuton of the assets of the estate other than that rep-
resented by the takng possesson of the persona assets by the e ecutor
(and benefcary) as of the date of the gvng of the speca bond.
ccordngy, n such a case the date of the approva of the speca bond,
n effect, marked the date of the dstrbuton of the assets of the estate.
SUPPL M NT . NONR SID NT LI N INDI IDU LS.
S CTION 212. GROSS INCOM .
Secton 19.212-2: cuson of earnngs 19 2-25-11129
of foregn shps from gross ncome. I. T. 3559
( so Secton 231, Secton 19.231-3.)
INT RN L R NU COD .
Panama st satsfes the equvaent e empton provsons of sec-
tons 212(b) and 231(d) of the Interna Revenue Code, n vew of
resouton No. 230 of the Mnstry of the Treasury and Fnance of
Panama dated March 12, 19 2.
dvce s requested whether Panama st satsfes the equvaent
e empton provsons of sectons 212(b) and 231(d) of the Interna
Revenue Code n vew of artce 1, Chapter I, of aw No. 52 of May 23,
19 1, estabshng the ncome ta , as passed by the Natona ssemby
of Panama, and resouton No. 230, sgned by the Mnster of the Treas-
ury and Fnance of the Repubc of Panama on May 12,19 2.
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133
19.21 -1.
In I. T. 3 65 (C. . 19 1-1, 268), frst pubshed n I. R. . 19 1-15,
dated pr 1 ,19 1, t was hed that Panama satsfed such e empton
provsons, based upon the aw then n effect.
rtce 1, Chapter I, of aw No. 52 of May 23, 19 1, effectve uy 1,
19 1, reads as foows:
rtce 1. There Is estabshed a ta on ta abe Income as defned heren of
a persons, whether natura or urdca, whether domestc or foregn, whether
or not domced n Panama, whch ncome s obtaned wthn the terrtory of the
Repubc of Panama, correspondng to the prevous ta year on account of empoy-
ment, busness, ndustry, commerce, professon, trade or any other occupaton,
or arsng from any knd of rea or persona property or from any other source
wthn the country, rrespectve of the pace where the sad ncome s receved.
Resouton No. 230, dated March 12, 19 2, provdes n part as fo-
ows :
s the ncome (revenues) produced by Internatona martme trade by mer-
chant vesses of the U. S. . or of any other country are not specfed as ta abe
n artce 1 of aw No. 52 of May 23, 19 1,
IT IS R WIT R SOL D:
That the ncome arsng from martme commerce of merchant vesses of the
Unted States or of any other naton cang at Panamanan ports s not sub|ect
to the ncome ta created by aw No. 52 of May 23.19 1.
ccordngy, n vew of resouton No. 230, t s hed that Panama
st satsfes the equvaent e empton provsons of sectons 212(b)
and 231 (d) of the Interna Revenue Code.
S CTION 21 . CR DITS G INST N T INCOM .
Secton 19.21 -1: Credts to nonresdent 19 2-6-1098
aen ndvduas. G. C. M. 230C6
INT RN L R NU COD .
nonresdent aen Indvdua who s a resdent of Canada or
Me co s entted to a credt of 00 for each person quafyng
under the aw as a dependent. Secton 25(b)2( ) of the Inter-
na Revenue Code, as amended by secton 113 of the Revenue ct of
19 1, s not appcabe to such cases.
n opnon s requested whether a nonresdent aen ndvdua who
s a resdent of Canada or Me co s entted to a credt of 00 for
each dependent for ta abe years begnnng after December 31, 19 0,
or whether secton 25(b)2( ) of the Interna Revenue Code, as
amended by secton 113 of the Revenue ct of 19 1, s appcabe to
such an ndvdua so as to deny credt for one dependent f the ta -
payer woud not occupy the status of head of a famy e cept by rea-
son of there beng one or more dependents for whom he woud be
entted to credt under subparagraph ( ) of secton 25(b)2.
Secton 21 of the Interna Revenue Code, as amended by secton
111(b) of the Revenue ct of 19 1, provdes:
Sec. 21 . Credts ganst Net Income.
In the case of a nonresdent aen ndvdua the persona e empton aowed
by secton 25(b) (1) of ths chapter sha be ony 750. The credt for depend-
ents aowed by secton 25(b)(2) sha not be aowed n the case of a non-
resdent aen ndvdua uness he s a resdent of a contguous country.
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19.21 -1.1
13
Secton 113 of the Revenue ct of 19 1 provdes:
Sec. 113. Credts foe Dependents.
Secton 25(b) (2) of the Interna Revenue Code (reatng to credt for depend-
ents) s amended to read as foows:
(2) Credt fob dependents.
( ) owance n Genera. 00 for each person (other than husband
or w. fe) dependent upon and recevng hs chef support from the ta payer
If such dependent person s under eghteen years of age or s ncapabe of
sef-support because mentay or physcay defectve.
( ) cepton for Certan eads of Fames. If the ta payer woud
not occupy the status of head of a famy e cept by reason of there beng
one or more dependents for whom he woud be entted to credt under sub-
paragraph ( ), the credt under such subparagraph sha be dsaowed
wth respect to one n such dependents.
The ntent of Congress n enactng secton 113 of the Revenue ct
of 19 1 s set forth n the report of the Senate Fnance Commttee
(Rept. 673, Part 1, page 28 C. . 19 1-2, 66 , as feows:
Secton 113. Credt for Dependents.
Ths secton s the same as secton 110 of the ouse b whch amends
secton 25(b)2 of the Interna Revenue Code reatve to the credt for dependents.
In the case of the head of a famy or a marred person vng wth husband
or wfe, the e stng aw provdes as a credt aganst net ncome a persona
e empton pus 00 for each dependent other than husband or wfe. Under
these provsons, a marred person vng wth husband or wfe and havng no
dependents receves as a ma mum credt the persona e empton. On the other
hand, an unmarred person mantanng a home for a person who aso quafes
as a dependent may receve n addton to the same persona e empton a
credt for 00 for such dependent. The proposed egsaton dsaows the
credt for one dependent n cases where the ta payer s status as head of a
famy s occasoned soey by the e stence of one or more of such dependents.
The amendment w not affect any case e cept one n whch the ta payer occu-
pes the status as head of a famy soey by reason of the e stence of a person
tor whom he s aso entted to the credt for a dependent. For nstance, t w
not operate to reduce the credt n the case where a wdower s mantanng
a home for two chdren, ony one of whom quafes as a dependent. In such
case, the status as head of a famy s not occasoned soey by e stence of the
chd In respect of whom the credt of 00 s aowed and consequenty the
ta payer may he entted to the persona e empton nowed the head of a
famy pus the 00 credt, the same as under e stng aw.
It thus appears that the purpose of the amendment to secton
25(b) 2 of the Interna Revenue Code by secton 113 of the Revenue
ct of 19 1 was to prevent an ndvdua from obtanng two bene-
fts, vz, an ncreased persona e empton and a 00 credt n the
cases descrbed, and that the secton was ntended to appy ony to
a ta payer who not ony s head of a famy but aso receves the
credt of 1,500 aowed to the head of a famy. Snce a nonresdent
aen ndvdua s not aowed a credt of 1,500 as the head of a
famy and a dependent does not n hs case gve rse to such credt,
t seems cear that the e cepton for certan heads of fames con-
taned n secton 25(b)2( ), as amended by secton 113 of the Rev-
enue ct of 19 1, s not appcabe to nonresdent aen ndvduas.
It foows that a nonresdent aen ndvdua who s a resdent of
Canada or Me co s entted to a credt of 00 for each person
quafyng under the aw as a dependent, n addton to a persona
e empton of 750 aowed by secton 21 of the Interna Revenue
Code.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
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135 19.262-2.
S CTION 217. R TURNS.
Secton 19 217-1: Tme and pace for fng returns
of nonresdent aen ndvduas.
INT RN L R NU COD .
Reguatons 103, amended. (See T. D. 51 9, page 93.)
S CTION 218. P YM NT OF T .
Secton 19 218-1: Date on whch ta sha be pad
by nonresdent aen ndvdua.
INT RN L R NU COD .
Reguatons 103, amended. (See T. D. 51 9, page 93.)
SUPPL M NT I. FOR IGN CORPOR TIONS.
S CTION 231. T ON FOR IGN CORPOR TIONS.
Secton 19.231-3: cuson of earnngs of foregn
shps from gross ncome.
INT RN L R NU COD .
Panama, equvaent e empton provsons of sectons 212(b) and
231 (d) of the Interna Revenue Code. (See L T. 3559, page 132.)
SUPPL M NT . C IN TR D CT CORPOR TIONS.
S CTION 2G2. CR DIT G INST N T INCOM .
Secton 19.262-2: Credts aowed Chna Trade 19 2-21-11105
ct corporatons. I. T. 3553
INT RN L R NU COD .
In the case of Chna Trade ct corporatons, such speca dv-
dends as coud have been dstrbuted on or before March 15, 19 2,
out of the earnngs of the year 19 1 but for the condtons prevang
In Chna snce the cose of 19 1 w be recognzed as a credt
aganst net ncome for the year 19 1, f dstrbuted on or before
une 15, 19 2.
dvce s requested whether n vew of present condtons n Chna,
the tme mt for the decaraton and dstrbuton of speca dvdends
by Chna Trade ct corporatons w be e tended.
The pertnent provsons of aw appcabe to the queston pre-
sented are contaned n secton 2G2 of the Interna Revenue Code, as
amended, whch reads n part as foows:
(a) owance of Credt. For the purpose ony of the ta es Imposed by
ectons 13, 1 , 15, and GOO of ths tte and secton 106 of the Revenue ct
of 1935 there sha be aowed, n the case of a corporaton organzed under
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19.262-2.
136
the Chna Trade ct, 1922, n addton to the credts aganst net ncome other-
wse aowed such corporaton, a credt aganst the net ncome of an amount
equa to the proporton of the net ncome derved from sources wthn Chna
(determned n a smar manner to that provded n secton 119) whch the
par vaue of the shares of stock of the corporaton owned on the ast day of the
ta abe year by (1) persons resdent n Chna, the Unted States, or possessons
of the Unted States, and (2) ndvdua ctzens of the Unted States or Chna
wherever resdent, bears to the par vaue of the whoe number of shares of
stock of the corporaton outstandng on such date: Provded, That n no case
sha the dmnuton, by reason of such credt, of the ta mposed by such
secton 13, 1 , or 15 (computed wthout regard to ths secton) e ceed the
amount of the speca dvdend certfed under subsecton (b) of ths secton;
and n no case sha the dmnuton, by reason of such credt, of the ta
mposed by such secton IOC or 600 (computed wthout regard to ths secton)
e ceed the amount by whch such speca dvdend e ceeds the dmnuton
permtted by ths secton In the ta mposed by such secton 13, 1 , or 15.
(b) Speca Dvdend. Such credt sha not be aowed uness the Secretary
of Commerce has certfed to the Commssoner
(1) The amount whch, durng the year endng on the date f ed by aw
for fng the return, the corporaton has dstrbuted as a speca dvdend
to or for the beneft of such persons as on the ast day of the ta abe year
were resdent In Chna, the Unted States, or possessons of the Unted
States or were ndvdua ctzens of the Unted States or Chna, and
owned shares of stock of the corporaton;
(2) That such speca dvdend was n addton to a other amounts, pay-
abe or to be payabe to such persons or for ther beneft, by reason of
ther nterest n the corporaton; and
(3) That such dstrbuton has been made to or for the beneft of such
persons n proporton to the par vaue of the shares of stock of the cor-
poraton owned by each; e cept that f the corporaton has more than one
cass of stock, the certfcates sha contan a statement that the artces
of ncorporaton provde a method for the apportonment of such speca
dvdend among such persons, and that the amount certfed has been ds-
trbuted n accordance wth the method so provded.

s stated n secton 19.262 3 of Reguatons 103, the term speca
dvdend means the amount whch durng the year endng on
March 15 succeedng the cose of the corporaton s ta abe year s
dstrbuted as a speca dvdend to or for the beneft of such persons
as on the ast day of the ta abe year were resdent n Chna, the
Unted States, or possessons of the Unted States, or were ndvdua
ctzens of the Unted States or Chna, and owned shares of stock
of the corporaton.
Chna Trade ct corporatons are domestc corporatons and fe
returns on the caendar year bass. Secton 53 of the Interna
Revenue Code provdes that returns made on the bass of the ca-
endar year sha be made on or before the 15th day of March foow-
ng the cose of the caendar year. Under secton 19.53-3 of Regua-
tons 103, however, an e tenson of tme to une 15, 19 2, foowng
the cose of the ta abe year for fng returns of ncome on the
caendar year bass for 19 1 s granted to domestc corporatons whch
transact ther busness and keep ther records and books of account
abroad.
In vew of the present stuaton n Chna, the ureau w recognze
speca dvdend dstrbutons by Chna Trade ct corporatons n
19 2 f dstrbuted on or before une 15, 19 2, wth the understandng
that ths e ceptona rung s to be construed as appcabe ony to
the year 19 1; that n subsequent years the reguatons whch pre-
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137
19.262-2.
scrbe March 15 as the ast day on whch such dvdends may be
dstrbuted for the purpose of the statute w govern ths sub|ect;
and that n order for such dvdends dstrbuted on or before une 15,
19 2, to be recognzed as a credt aganst net ncome for the caendar
year 19 1, they must be dstrbuted out of earnngs for the year 19 1.
In other words, ony such dvdends as coud have been dstrbuted
on or before March 15, 19 2, out of the earnngs of the year 19 1
but for the condtons prevang n Chna snce the cose of 19 1
w be recognzed as a credt aganst net ncome for the year 19 1,
f dstrbuted on or before une 15, 19 2.
Gut T. evehnq,
Commssoner of Interna Revenue.
pproved.
ohn L. Suvan,
ctng Secretary of the Treasury.
Secton 19.262-2: Credts aowed Chna Trade 19 2-26-11133
ct corporatons. I. T. 3561
INT RN L R NU COD .
In the case of Chna Trade ct corporatons, such speca dv-
dends as coud have been dstrbuted on or before March 15,
19 2, out of the earnngs of the year 19 1 but for condtons pre-
vang n Chna snce the cose of 19 1 w be recognzed as a
credt aganst net ncome for the year 19 1, f dstrbuted on or
before September 15, 19 2.
Tme for fng returns for 19 1 by Chna Trade ct corporatons
e tended to September 15, 19 2.
I. T. 3553 page 135, ths uetn modfed.
dvce s requested whether the tme mts for the decaraton and
dstrbuton of speca dvdends, and for the fng of Federa ncome
ta returns, by Chna Trade ct corporatons for the caendar year
19 1, as e tended by I. T. 3553 page 135, ths uetn , w be
further e tended.
In vew of the e traordnary condtons e stng n Chna, on
account of whch the nformaton necessary to the decaraton and
dstrbuton of speca dvdends s unavaabe, the ureau w
recognze speca dvdend dstrbutons by Chna Trade ct cor-
poratons n 19 2 f dstrbuted pror to September 15, 19 2, wth
the same understandng as set forth n I. T. 3553, supra.
In vew of the same crcumstances, a further e tenson of tme
to September 15, 19 2, s hereby granted Chna Trade ct corpora-
tons for fng ther Federa ncome ta returns for the caendar
year 19 1. Those Chna Trade ct corporatons avang themseves
of ths addtona e tenson of tme w be charged wth nterest
at the rate of 6 per cent per annum on the frst and second nsta-
ments of ta from the orgna due dates, March 15 and une 15,
respectvey, unt pad.
Under the provsons of e stng aw (secton 53 of the Interna
Revenue Code), a further e tenson of tme beyond September 15,
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19. 00-1.1 138
19 2, may not be granted Chna Trade ct corporatons for the fng
of ther returns for the caendar year 19 1.
I. T. 3553, supra, s modfed accordngy.
Gut T. b verno,
Commssoner of Interna Revenue.
pproved.
ohn L. Suvan,
ctng Secretary of the Treasury.
SUPPL M NT T. INDI IDU LS WIT GROSS INCOM FROM C RT IN SOURC S OF
3,000 OR L SS.
S CTION 00. IMPOSITION OF T .
Secton 19. 00-1: Scope and appcaton of 19 2-15-11055
Suppement T. I. T. 35 7
INT RN L R NU COD .
mounts receved by empoyees as rembursements and per dem
aowances for traveng e penses consttute compensaton for
persona servces wthn the meanng of secton 00, Suppement
T, of the Interna Revenue Code, as added by secton 102 of the
Revenue ct of 19 1, whch suppement reates to ndvduas wth
gross ncome from certan sources of 3,000 or ess. Such amounts
must be Incuded n gross ncome by persons fng Form 10 0
(Optona Unted States Indvdua Income Ta Return) and no
part thereof s an aowabe deducton f that form s used.
If Optona Income Ta Return, Form 10 0 , s fed, the eecton
made s rrevocabe and Income Ta Return, Form 10 0, may
not thereafter be fed for the same ta abe year.
dvce s requested wth respect to the amount to be ncuded n
gross ncome by empoyees who receve rembursements and per dem
aowances for traveng e penses and who fe Form 10 0 (Optona
Unted States Indvdua Income Ta Return) under the provsons
of secton 00, Suppement T, of the Interna Revenue Code, as
added by secton 102 of the Revenue ct of 19 1. It s stated that
the queston has arsen n cases of traveng men recevng compensa-
ton and aso rembursement for traveng e penses, per dem aow-
ances, etc. The foowng types of cases have been submtted:
1. receves
2, 00 commsson; 500 rembursement of traveng e penses, per
dem aowances, etc. e has adequate records of aowabe traveng
e penses of 00.
2. receves
2, 00 commsson; 300 rembursement of traveng e penses, per
dem aowances, etc. e has adequate records of aowabe traveng
e penses of 350.
Secton 23(a) 1 of the Interna Revenue Code provdes n part that
n computng net ncome there sha be aowed as deductons traveng
e penses (ncudng the entre amount e pended for meas and odg-
ng) whe away from home n the pursut of a trade or busness. Sec-
ton 19.23(a)-2 of Reguatons 103 provdes n part that f an nd-
vdua receves a saary and s aso repad hs actua traveng e penses,
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139
19. 00-1.
he sha ncude n gross ncome the amount so repad and may deduct
such e penses. Secton 19.23(a)-2 provdes further that f an nd-
vdua receves a saary and aso an aowance for meas and odgng,
as, for e ampe, a per dem aowance n eu of subsstence, the amount
of the aowance shoud be ncuded n gross ncome and the cost of
such meas and odgng may be deducted therefrom.
Senate Report No. 6 3, Part 1, Seventy-seventh Congress, frst ses-
son, on the revenue b of 19 1 (C. . 19 1-2, 66, at 73) reads n
part as foows:
In order that persons In the ower Income ta brackets, partcuary those
brought n by the reducton of the persona e emptons, may be caused a mnmum
of dffcuty n fng out ther returns, the optona use of a smpfed return s
proTded where the gross ncome of the ta payer does not e ceed 3,000. If the
ta payer eects to use ths smpfed pan, the amount of the ta may be ready
ascertaned by reference to a tabe contaned In the b. Ths smpfed return
may be used ony where the ta payer s Income s derved soey from saares,
wages, compensaton for persona servces, dvdends, nterest, rent, annutes, or
royates. If the ta payer eects to use ths method, no deductons or credts
aganst net ncome are aowed. In eu of these deductons and credts, the ta
provded n the tabe represents a reducton of 10 per cent of the ta that woud
otherwse be payabe wthout suc deductons or credts. Ths 10 per cent
reducton has been found to be the effect of the average amount of deductons
taken by persons n the ower Income brackets.
Secton 00, Suppement T, of the Interna Revenue Code, as added
by secton 102 of the Revenue ct of 19 1, provdes for a progressve
ta , at the eecton of ndvduas, on ncomes rangng from 750 to
3,000 per annum, consstng whoy of saary, wages, compensaton for
ersona servces, etc. s ndcated n the Senate report referred to
eren, an arbtrary aowance for deductons to whch a ta payer
woud be entted was taken nto consderaton n determnng the aver-
age amount of ta whch woud ordnary be payabe upon the desg-
nated gross ncomes enumerated n secton 00 of the Code. The use
of Form 10 0 , the return prescrbed for secton 00 of Suppement T,
s not mandatory. In ths connecton, t shoud be noted that secton
02, Suppement T, of the Interna Revenue Code, as added by secton
102 of the Revenue ct of 19 1, provdes that the eecton referred to
n secton 00 sha be consdered to have been made f the ta payer fes
the return prescrbed for Suppement T and such eecton sha be
rrevocabe. In some cases n whch Form 10 0 has been fed t
may deveop that the ta payer woud have been abe for ess ta had
he fed Form 10 0 (Unted States Indvdua Income Ta Return),
whch provdes for the aowance of Deductbe e penses ncurred
n connecton wth Saares and other compensaton for persona
servces. (See tem 1 of Form 10 0.) If Form 10 0 s fed, how-
ever, the eecton made s rrevocabe, and Form 10 0 may not there-
after be fed for the same ta abe year.
In vew of the foregong, t s hed that amounts receved by em-
poyees as rembursements and per dem aowances for traveng e -
penses consttute compensaton for persona servces wthn the
meanng of secton 00, Suppement T, of the Interna Revenue Code,
as added by secton 102 of tne Revenue ct of 19 1. It foows that
n the cases of and , supra, f the optona return, Form 10 0 , s
fed, the amount to be reported on ne 1 thereof (saary, wages, and
compensaton for persona servces) n the case of s 2,900, and the
amount to be reported n the case of s 2,700.
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Regs. 109, 30.71 (a)- .
1 0
SU C PT R . C SS PROFITS T .
S CTION 711. C SS PROFITS N T INCOM .
Reguatons 109. Secton 30.711 (a)- : Ta for
perod of ess than 12 months.
19 2-5-10976
G. C. M. 2306
INT RN L R NU COD .
fna e cess profts ta return coverng the perod anuary 1,
19 0, to une 30, 19 0, as of whch date the M Company ceased opera-
tons and was dssoved, the corporaton retanng no assets, s a
return for a perod of s months. Under secton 711 (a)3 of the
Interna Revenue Code, the e cess profts net ncome shoud he paced
on an annua bass.
n opnon s requested whether, n the case of the M Company,
whch fed a fna e cess profts ta return for the perod anuary 1,
19 0, to une 30, 19 0, the e cess profts net ncome shoud be paced
on an annua bass.
Pror to 1939, the ta payer, the M Company, reported ts ncome on
a fsca year bass, fng ts ast return on such bass for the fsca year
ended ugust 31,1939. The corporaton obtaned permsson to change
ts accountng perod to the caendar year bass and fed a return for
the perod September 1, 1939, to December 31, 1939. s of une 30,
19 0, the corporaton ceased operatons and was dssoved, and, as of
the cose of busness on that date, a of ts assets were transferred to
a partnershp composed of ts former stockhoders. In uy, 19 0, an
ncome ta return was fed n whch was ncuded the ncome receved
durng the perod anuary 1,19 0, to une 30,19 0. Subsequent to the
enactment of the Second Revenue ct of 19 0, on October 8, 19 0,
whch added Subchapter ( cess Profts Ta ) to Chapter 2 of the
Interna Revenue Code, an e cess profts ta return was fed coverng
the same perod. The e cess profts credt provded by secton 712 of
the Interna Revenue Code was computed under secton 713 of the Code,
. e., an e cess profts credt based on ncome.
Secton 7(b) of the Interna Revenue Code provdes as foows:
(b) Income Computes) on ass of Short Perod. Where a separate return s
made under subsecton (a) on account of a change n the accountng perod, and
n a other cases where a separate return s requred or permtted, by reguatons
prescrbed by the Commssoner wth the approva of the Secretary, to be made
for a fractona part of a year, then the ncome sha be computed on the bass of
the perod for whch separate return s made.
Secton 8(a) of the Interna Revenue Code reads n part as foows:
(a) Ta abe Year. Ta abe year ncudes, In the case of a return
made for a fractona part of a year under the provsons of ths chapter chapter
1 or under reguatons prescrbed by the Commssoner wth the approva of the
Secretary, the perod for whch such return s made.
Secton 711 (a)3 of the Interna Revenue Code provdes n part as
foows:
(3) Ta abe Year Less Than Tweve Months. If the ta abe year s a perod
of ess than tweve months the e cess profts net ncome sha be paced on an
annua bass by mutpyng the amount thereof by the number of days n the
tweve months endng wth the cose of the ta abe year and dvdng by the
number of days In the ta abe year.
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1 1
Regs. 109, 30.713-1.
The ast sentence of secton 30.711 (a)- of Reguatons 109, reatng
to the e cess profts ta under the Interna Revenue Code, as amended
by the Second Revenue ct of 19 0, provdes as foows:
The frst ta abe year of a corporaton whch fes a return of In-
come receved or accrued from the date of ts ncorporaton to the end of Its frst
accountng perod s a perod of ess than 12 months, where the perod between
the date of ncorporaton and the end of such frst accountng perod s ess than
12 months.
Secton 30.729-1 of Reguatons 109, supra, reads n part as foows:
Sec. 30.720-1. Tme and pace for fng returns. The e cess profts
ta return of a corporaton of Income receved or accrued from the date of ts
ncorporaton to the end of ts frst accountng perod, where the perod between
the date of ncorporaton and the end of such perod s ess than 12 months,
sha be consdered as a return for a fractona part of a year, and sha be
fed wthn the tme prescrbed for fng returns for ta abe years of ess
than 12 months.
In the nstant case the facts show that the corporaton was dssoved
on une 30, 19 0, and retaned no assets whatever. Under such cr-
cumstances, ths offce can not dstngush, n so far as the present
nqury s concerned, between the case of a new corporaton and one
whch has competey dssoved.
Ths offce s of the opnon, therefore, that the e cess profts ta
return fed by the M Company coverng the perod anuary 1, 19 0,
to une 30, 19 0, as of whch date the ta payer corporaton ceased
operatons and was dssoved, the corporaton retanng no assets,
s a return for a perod of s months; and that under the provsons
of secton 711 (a)3 of the Interna Revenue Code, supra, the e cess
profts net ncome shoud be paced on an annua bass. To hod
otherwse woud mean that aganst the s months ncome there
woud be aowed an e cess profts credt based on an average base
perod net ncome nvovng 12 months.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
S CTION 713. C SS PROFITS CR DIT-
S D ON INCOM .
Reguatons 109, Secton 30.713-1: cess 19 2-5-10977
profts credt based on ncome Determna- G. C. M. 230 7
ton of average base perod net ncome.
INT RN L R NU COD .
In computng the average base perod net Income for e cess
profts ta purposes under secton 713(f) of the Interna Revenue
Code, as amended by secton of the cess Profts Ta mend-
ments of 10 1, where there wns a defct for the frst haf of the
base perod, t shoud be gven ts fu effect as a defct and not
treated as zero. Therefore, such a defct shoud be added to the
net ncome for the second haf of the base perod to determne the
dfference to be dvded by 2 under paragraph (3) of secton 713(f)
dvce s requested whether, n the appcaton of secton 713(f)
of the Interna Revenue Code, as amended, reatng to the computa-
ton of the average base perod net ncome for e cess profts ta
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Regs. 109, 30.713-1.
1 2
purposes, a defct for the frst haf of the base perod shoud be
treated as zero, or whether t shoud be gven ts fu effect as a defct
n determnng the dfference between the aggregate of the e cess
profts net ncome for each of the ta abe years n the frst haf of
the base perod and the aggregate of the e cess profts net ncome
for each of the ta abe years n the second haf of the base perod.
The foowng stuaton s assumed for the purpose of ustraton:
1936 (defct) ( 2,500)
1937 (defct) ( 2,500)
1938 (defct) ( 5,000)
1939 30, 000
It w be observed that n the assumed statement of facts the
aggregate of the e cess profts net ncome for each of the years
n the frst haf of the base perod s mnus 5,000 and the aggre-
gate of the e cess profts net ncome for each of the years n the
second haf of the base perod s 25,000 ( 30,000 mnus 5,000). The
queston presented s whether the mnus 5,000 for the frst haf
shoud be treated as zero, so that the dfference between the amounts
for each haf w be 25,000, or whether the mnus 5,000 for the
frst haf shoud be added to the pus 25,000 for the second haf,
makng a dfference of 30,000.
Under the e cess profts ta aw reef s afforded to corporatons
whch e perenced rapd growth durng the base perod, by permt-
tng such corporatons to take an e cess profts credt (aganst e -
cess profts net ncome before computng e cess profts ta ) n an
amount equa to the greater of the credts computed under aternatve
methods. (See oume 87, Part 2, Congressona Record, page 1379.)
Wth a vew to effectuatng the manfest ntent of Congress to gve
the ta payer the beneft of the greater of the e cess profts credts
computed under secton 713 or secton 71 , respectvey, secton
713(f), n so far as appcabe, provdes as foows:
(/) verage ase Perod Net Incomb: Increased arnngs In Last at
of ase Perod. The average base perod net ncome determned under ths sub-
secton sha be determned as foows:
(1) y computng, for each of the ta abe years of the ta payer n ts
base perod, the e cess profts net ncome for such year, or the defct
n e cess profts net ncome for such year;
(2) y computng for each haf of the base perod the aggregate of the
e cess profts net ncome for each of the ta abe years n such haf, reduced, f
for one or more of such years there was a dtfct n e cess profts net ncome,
by the sum of such dtfcts. For the purposes of such computaton, f any
ta abe year s party wthn each haf of the base perod there sha be ao-
cated to the frst haf an amount of the e cess profts net ncome or defct n
e cess profts net ncome, as the case may be, for such ta abe year, whch
bears the same rato thereto as the number of months fang wthn such haf
bears to the entre number of months n such ta abe year; and the remander
sha be aocated to the second haf;
(3) If the amount ascertaned under paragraph (2) for the second
haf s greater than the amount ascertaned for the frst haf, by dvdng
the dfference by two;
( ) y addng the amount ascertaned under paragraph (3) to the
amount ascertaned under paragraph (2) for the second haf of the
base perod;
Secton 713(f)2 requres the computaton for each haf of the base
perod of the aggregate of e cess profts net ncome for each of the
ta abe years n such haf, reduced, f for one or more of such years
there was a defct n e cess profts net ncome by the sum of such
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1 3
Regs. 109, 30.71 -2.
defcts. Itacs supped. In the assumed statement of facts, for
the frst haf of the base perod there were no years n whch an e cess
profts net ncome e sted, and, therefore, the aggregate of e cess
profts net ncome for such haf s zero. Ths aggregate fgure of zero
s, however, by the very terms of the statute, to be reduced by the sum
of the defcts n e cess profts net ncome n such haf. The sum of
the defcts n such haf s 5,000. There s n the aw no ndcaton
that when the sum of the defcts of e cess profts net ncome s greater
than the aggregate of e cess profts net ncome the atter can not be
reduced by the former to a fgure beow zero. In fact, t s a far
assumpton that had Congress ntended otherwse t woud have so
provded, as, for e ampe, t dd n secton 713(d) 3, whch provdes
that In no case sha the average base perod net ncome be ess
than zero. Reducng the aggregate e cess profts net ncome of zero
doars by the sum of the defcts n e cess profts net ncome n the
amount of 5,000 resuts n a 5,000 defct n the net aggregate earn-
ngs for the frst haf of the base perod.
In the second haf of the base perod, the aggregate of the e cess
profts net ncome s 30,000 (the e cess profts net ncome for 1939),
and that fgure reduced by the sum of the defcts n e cess profts net
ncome (the 5,000 defct n 1938) gves a resutng net aggregate of
earnngs n the second haf of the base perod of 25,000.
Secton 73(f)3 provdes that f the amount ascertaned under
paragraph (2) for the second haf s greater than the amount ascer-
taned for the frst haf, the dfference s to be dvded by 2. The df-
ference between two amounts s that amount whch when added to the
smaer of the two amounts equas the arger amount. Ths construc-
ton derves some support from secton 30.713-1 (c)2 of Reguatons
109 as added by Treasury Decson 50 5 (C. . 19 1-1, 69), whch pro-
vdes that n makng the computaton under secton 713(f) a defct
n e cess profts net ncome for any ta abe year s not counted
as zero as n the case of the computaton under the genera average
method descrbed n subsecton (b) of ths secton. s apped to the
nstant case, the dfference between a tota defct of fve thousand do-
ars ( 5,000) ana a net aggregate earnngs of twenty-fve thousand
doars ( 25,000) s 30,000.
It s, therefore, the opnon of ths offce that n the assumed state-
ment of facts the amount by whch the earnngs for the second haf of
the base perod e ceed the earnngs for the frst haf of the base perod
s, wthn the meanng of secton 713(f) of the Interna Revenue Code,
30,000.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
S CTION 718. UITY IN ST D C PIT L.
Reguatons 109, Secton 30.718-2: Determnaton of
day equty nvested capta ccumuated earnngs
and profts.
INT N L R NU COD .
ffect of amortzaton deductons under secton 12 of the Interna
Revenue Code, as amended. (See I. T. 35 3, page 111.)
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Regs. 109, 30.720-1.
1
S CTION 720. DMISSI L ND IN DMISSI L SS TS.
Reguatons 109, Secton 30.720-1: Reducton of 19 2-25-11130
average nvested capta for nadmssbe assets. I. T. 3500
INT RN L R NU COD .
The certfcate of membershp In the M Chamber of Commerce
owned by the N Company consttutes an nadmssbe asset wthn the
purvew of secton 720 of the Interna Revenue Code for Federa
e cess profts ta purposes.
dvce s requested whether the certfcate of membershp n the M
Chamber of Commerce hed by the N Company consttutes an adms-
sbe or nadmssbe asset wthn the purvew of secton 720 of the
Interna Revenue Code, for the purpose of computng the e cess profts
ta abty of the N Company.
The M Chamber of Commerce was ncorporated under the aws of
the State of R. Shares of stock n the M Chamber of Commerce were
not ssued, but membershp certfcates were ssued to those members
who purchased a benefca nterest n the net worth of the corporaton,
membershps carryng the rght to eect offcers, etc. Over a perod of
years there has been an accumuaton of net worth, whch n 19 0
amounted to neary a mon doars, desgnated on the corporaton s
books as Surpus. No capta accounts showng the capta pad n
by each member e st. owever, the net worth, or surpus, s aocated
to the severa hundred members.
Under secton 715 of the Interna Revenue Code, defnng nvested
capta for the purpose of computng the e cess profts ta under the
nvested capta method, provson s made for reducng the average
nvested capta, determned under secton 716, by an amount com-
puted under secton 720 reatng to nadmssbe assets. Secton
720(a) 1( ) of the Code defnes nadmssbe assets to mean stock n
corporatons, wth certan e ceptons not matera here. Constru-
ng secton 720 of the Code by tsef, t mght be argued that the cost
of the N Company s membershp certfcate shoud be hed to be an
admssbe asset by reason of the fact that such asset does not conform
wth the ownershp of stock n a corporaton. It seems, however,
to have been the evdent ntent of the statute to requre a broader n-
terpretaton of the term stock. Such vew s borne out by reference
to secton 728 of the Code, wheren t s provded that The terms
used n ths subchapter sha have the same meanng as when used n
Chapter 1. Secton 3797(a) thereof (defntons) provdes n part
as foows:
(3) Corporaton. The term corporaton ncudes assocatons, ont-stock
companes, and Insurance companes.
(7) Stock. The term stock ncudes the share n an assocaton, |ont-stock
company, or nsurance company.
(8) Sharehoder. The term sharehoder ncudes a member n an assoca-
ton, |ont-stock company, or nsurance company.
member of a corporaton, by reason of the ownershp of a share
of benefca nterest n the net worth of such body evdenced by
a membershp certfcate, s, n so far as abty for Federa ta es
s concerned, n the same category as one who owns a stock certfcate
n a corporate body as evdence of hs pro rata ownershp theren.
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1 5
Regs. 109, 30.722-3.
The N Company s a member of the M Chamber of Commerce, a
corporaton, and owns a share n the net worth of such corporaton.
The ownershp of such share, even though evdenced by a so-caed
membershp certfcate nstead of a stock certfcate, s the equvaent
of the ownershp of stock n a corporaton.
It s hed, therefore, that the certfcate of membershp n the M
Chamber of Commerce hed by the N Company shoud be treated as
an nadmssbe asset n the appcaton of secton 720 of the Interna
Revenue Code n the computaton of the N Company s e cess profts
ta abty.
S CTION 722. D USTM NT OF NORM L
S P RIOD N T INCOM .
Reguatons 109, Secton 30.722-3: Determna- 19 2-23-11120
ton of substtute average base perod net ncome. T. D. 5153
( so Reguatons 109, Secton 30.722-5.)
TITL 28 INT RN L R NU . C PT R I, SU C PT R . P RT 30.
C SS PROFITS T .
mendng sectons 30.722-3 (e) and (e) and 30.722-5(o) of Regu-
atons 109, reatng to the nterrupton or dmunton of norma
producton, output, or operaton and abnormay arge tems of
ncome and abnormay sma tems of deductons n the base perod.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. G.
To Coectors of Interna Revenue and Others Concerned:
Reguatons 109 Part 30, Tte 26, Code of Federa Reguatons,
19 1 Sup. , as added by Treasury Decson 50 5, approved May 3,
19 1 C. . 19 1-1, 69 , are amended as foows:
Paragraph 1. Secton 30.722-3(c) s amended as foows:
(1) y changng the thrd sentence to read as foows:
Such average producton, output, or operaton may be estabshed by the average
amount of producton, output, or operaton for the four prevous ta abe years,
or, f the ta payer was not n e stence for four prevous ta abe years, then
for the prevous ta abe years durng whch t was n e stence, for other
prevous base perod ta abe years durng whch t was not n e stence but for
whch an e cess profts net ncome s estabshed under ths secton, and for so
many of the succeedng ta abe years endng before une 1, 19 0, as do not
make the tota ta abe years n the test perod more than four.
(2) y nsertng mmedatey after the thrd sentence the foowng
sentence:
In determnng the average amount of producton, output, or operaton wth
respect to products or servces of the same cass, the amount of producton, out-
put, or operaton for a year n the base perod for whch there was a dfference
n the character of the busness or an nterrupton or dmnuton of norma
producton, output, or operaton caused by an abnorma event s the amount of
producton, output, or operaton estabshed for such year; the amount of pro-
ducton, output, or operaton ad|usted as provded heren sha be used In com-
putng the average amount of producton, output, or operaton for the appcaton
of secton 722(a) (3) ( ) to a subsequent ta abe year.
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Regs. 109, 30.729-1.
1 6
Par. 2. Secton 30.722-3 (e) s amended by changng n the second
paragraph the second sentence thereof to read as foows:
In such a case, the average amount of gross ncome of the same cass or of
deductons of the same cass sha be determned by averagng the amounts of
such cass for the four prevous ta abe years, or, f the ta payer was not n
e stence for four prevous ta abe years, then for the prevous ta abe years
durng whch t was n e stence, for other prevous base perod ta abe years
durng whch t was not n e stence but for whch an e cess profts net ncome
s estabshed under ths secton, and for so many of the succeedng ta abe years
endng before une 1, 19 0, as do not make the tota ta abe years n the test
perod more than four.
Par. 3. Secton 30.722-5(a) s amended by changng tem number
(9), n the st of tems of nformaton requred, as foows:
(1) y strkng out and at the end of subdvson ();
(2) y strkng out the semcoon at the end of subdvson ()
and nsertng n eu thereof , and ;
(3) y nsertng mmedatey after subdvson () the foow-
ng:
(v) f a dfference n the character of busness s aso the bass of the
appcaton, the producton, output, or operaton whch the ta payer woud
have had for each of the ta abe years n the base perod for whch ad|ust-
ments were made under secton 722(a)(3)( ), and a detaed statement
showng how such amounts were determned.
(Ths Treasury decson s ssued under authorty contaned n
secton 62 of the Interna Revenue Code (53 Stat., 32; 26 U. S. C,
secton C2), as made appcabe by secton 729 of the Interna Reve-
nue Code, added by the Second Revenue ct of 19 0 (Pubc, No.
801, Seventy-s th Congress, thrd sesson), and secton 6 of the -
cess Profts Ta mendments of 19 1 (Pubc aw 10, Seventy-seventh
Congress).)
Gut T. everng,
Commssoner of Interna Revenue.
pproved une , 19 2.
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster une 5,19 2, .18 p. m.)
Reguatons 109, Secton 30.722: ppcaton for
reef under secton 722.
INT RN L R NU COD .
Rsguatons 109, amended. (See T. D. 5153, page 1 5.)
S CTION 729. L WS PPLIC L .
Reguatons 109, Secton 30.729-1: Tme and pace for
tng returns.
nterna revenue code.
ppcatons for e tenson of tme for fng returns. (See I. T.
3529, page 96.)
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1 7
730.
Reguatons 109, Secton 30.729-1: Tme and 19 2-1 -110 9
pace for fng returns. T. D. 5131
TITL 28 INT RN L R NU C PT R I, SU C PT R , P RT 30.
C SS PROFITS T .
mendng secton 30.729-1 of Reguatons 109, reatng to returns
for a fractona part of a year.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
Secton 30.729-1 of Reguatons 109 Part 30, Tte 26, Code of
Federa Reguatons, 19 1 Sup. s amended by changng the ast
sentence of the frst paragraph thereof to read as foows:
The e cess profts ta return of a corporaton of ncome receved or accrued
(1) from the date of Its ncorporaton to the end of ts frst accountng
perod, where the perod between the date of ncorporaton and the end of
such perod s ess than 12 months, or
(2) from the begnnng of ts ast accountng perod to the date t ceases
operatons and s dssoved, retanng no assets, where the perod between
the begnnng of the accountng perod and such date s ess than 12 months,
sha be consdered as a return for a fractona part of a year consstng of
such perod, and sha be fed wthn the tme prescrbed for fng returns
for ta abe years of ess than 12 months.
(Ths Treasury decson s ssued under the authorty contaned n
sectons 729 and 3791 of the Interna Revenue Code (1939), 53 Stat.,
67, (19 0), 5 Stat., 989 (U. S. C, Tte 26, sectons 729 and 3791).)
Norman D. Cann,
ctng Commssoner of Interna Revenue.
pproved March 31, 19 2.
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster pr 2, 19 2, 11. 6 a. m.)
S CTION 730. CONSOLID T D R TURNS.
19 2-11-11027
T. D.5126
TITL 26 INT RN L R NU . C PT R I, SU C PT R , P RT 33.
C SS PROFITS T .
Reguatons 110, reatng to consodated e cess profts ta
returns, amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
Reguatons 110 Part 33, Tte 26, Code of Federa Reguatons,
19 1 Sup. are amended as foows:
Paragraph 1. Secton 33.16(a) s amended as foows:
( ) y nsertng mmedatey after the second semcoon n the
thrd sentence the foowng:
notce and demand for payment of ta es w be gven ony to the common
parent, and such notce and demand sha be consdered as a notce and demand
to each such corporaton;
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5 730.
1 8
( ) y strkng from the fourth sentence that porton foowng
the semcoon and by nsertng n eu thereof the foowng:
any notce and demand for payment w name each corporaton whch was a
member of the affated group durng any part of such perod (but a faure
to ncude the name of any such corporaton w not affect the vadty of
the notce and demand as to the other corporatons) ; and any dstrant (or
warrant n respect thereof), any evy (or notce In respect thereof), any notce
of a en, or any other proceedng to coect the amount of any assessment, after
the assessment has been made, w name the corporaton from whch such
coecton s to be made.
Par. 2. Secton 33.30 s amended as foows:
( ) y changng the headng of paragraph (c) to read:
In case of profts from mnng strategc metas for years begnnng pror to
anuary 1, 19 1.
( ) y strkng for any ta abe year from the frst sentence of
paragraph (c) and nsertng n eu thereof for any ta abe year
begnnng pror to anuary 1,19 1.
Par. 3. Secton 33.31(a) s amended as foows:
( ) y strkng out subparagraph (16) and nsertng n eu
thereof the foowng:
(16) The consodated e cess profts credt based on nvested capta
(I) For a ta abe year begnnng pror to anuary 1,19 1, sha be 8 per cent
of the consodated nvested capta for such year, and
(II) For a ta abe year begnnng after December 31, 19 0, sha be 8
per cent of the consodated nvested capta for such year not n e cess
of 5,000,000 pus 7 per cent of that porton of the consodated Invested
capta for such year n e cess of 5,000,000;
( ) y strkng out and at the end of subdvson () of sub-
paragraph (18) and nsertng n eu thereof or any amount under
secton 718(a)(6) for new capta, ; by strkng out the semcoon
at the end of subdvson () of such subparagraph and nsertng n
eu thereof a comma and the word and ; and by nsertng at the
end of such subparagraph the foowng:
() For a ta abe year begnnng after December 31, 19 0, an amount
equa to 25 per cent of the consodated new capta for such year;
(C) y renumberng as (2 ) the subparagraph formery desg-
nated (23), and by strkng therefrom the e presson (a) (22) ()
and nsertng n eu thereof (a) (23) ().
(D) y changng subparagraphs (21). (22), (2 ), (25), (26), (27),
(28), (29), (30), (31), (32), and (33) to read, respectvev, (22), (23).
(25), (26), (27), (28), (29), (30), (31), (32), (33), and (3 ), and
by nsertng mmedatey after subparagraph (20), the foowng:
(21) The consodated new capta for a ta abe year begnnng after December
31, 19 0, sha be an amount equa to the aggregate new capta of the severa
affated corporatons for each day of such year (sub|ect to the mtatons
Imposed by secton 718(a)(6) (D), ( ), and (F) of the Code) dvded by the
number of days n such year; the mtatons mposed by secton 718(a) (6) (D),
( ), and (F) wth respect to ncreases n nadmssbe assets, ma mum new
capta aowabe, and reductons on account of dstrbutons out of pre-19 1
accumuated earnngs and profts sha be determned by reference to aggregate
equty nvested capta (computed wthout regard to (b) (2) (v) ( ) of ths
secton), the aggregate accumuated earnngs and profts, the aggregate nadms-
sbe assets, the aggregate borrowed capta, the aggregate money or property
pad n but e cuded by reason of secton 718(a) (6) ( ) or ( ), and the aggre-
gate dstrbutons, of the severa affated corporatons, computed n each case
pursuant to the provsons of these reguatons, both wth respect to the ta abe
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1 9
730.
year for whch the computaton Is beng made and wth respect to the begnnng
of the frst ta abe year begnnng after December 31, 19 0, and ntervenng years
(regardess of whether or not such corporatons were affated and regardess
of whether or not consodated returns were made or were requred pror to the
current year, e cept that no emnaton of ntercompany profts or osses sha
be made for separate return years) In the same manner and to the same e tent
as f such aggregates were, respectvey, the equty nvested capta, the accumu-
ated earnngs and profts, the nadmssbe assets, the borrowed capta, the
money or property pad n, and the dstrbutons, of a separate corporaton;
Par. . Secton 33.31 ( ) s amended as foows:
( ) y nsertng mmedatey after the words the accumuated
earnngs and profts or defct n accumuated earnngs and profts
as of the begnnng of the ta abe year, appearng n that porton
of subparagraph (2) precedng subdvson (), the foowng:
the new capta for any day of a ta abe year begnnng after December 31,
19 0, the equty nvested capta, the borrowed capta, the amount of dstrbu-
tons from earnngs and profts for the purposes of new capta computatons,
( ) y changng subdvsons (v) ( ), (C), (D). ( ), (G),
and ( ) of subparagraph (2) to read, respectvey, (v) (C), (D),
( ) , (F), (10, and (I), and by nsertng mmedatey after sub-
dvson (v) ( ) of subparagraph (2) the foowng:
( ) For a ta abe year begnnng after December 31, 19 0, there sha
be e cuded any amount under secton 718(a)(6) for new capta;
(C) y nsertng n subdvson (v) ( ) of subparagraph (2),
renumbered (v) (F) by ths Treasury decson, mmedatey after
the words, by reference to the bass of such stock the foowng:
, or of other property, and by strkng from such subdvson the
parenthetca e presson appearng theren and nsertng n eu
thereof the foowng:
(not ncudng as a precedng owner a member or former member of the group
from whch such stock or other property was acqured durng a consodated
ncome or e cess profts ta return perod, whether n compete or parta
qudaton or otherwse, and not ncudng as such stock the stock acqured
from another member wth a bass determned under secton 113(a)(7) of the
Code, or a correspondng secton of pror revenue aws, f, mmedatey pror to
the transfer, such stock was hed by such other member wth a bass by
reference to whch ths nferor subdvson (secton 33.31(6) (2) (v) (F))
woud be Inappcabe, and not ncudng as such stock the stock acqured n
a qudaton sub|ect to the provsons of secton 112(b)(6) of the Code, or
a correspondng secton of pror revenue aws, f, mmedatey pror to such
qudaton, the stock of the qudated corporaton was hed by the dstrbutee,
or the stock acqured n such qudaton was hed by the qudated corpora-
ton, wth a bass by reference to whch ths nferor subdvson woud be
Inappcabe),
and by strkng from (aa) of such nferor subdvson (C) and
(D) and nsertng n eu thereof (D) and ( ).
(D) y strkng out the nferor subdvson formery desgnated
(F) of subparagraph (2)(v), and by nsertng n eu thereof the
foowng:
(G) In the case of a member of the affated group the stock of whch
s hed by other members of such group wth a bass for determnng oss
upon a sae or e change not f ed, ether drecty or ndrecty, by refer-
ence to the bass of such stock, or of other property, n the hands of any
precedng owner (not ncudng as a precedng owner a member or former
member of the group from whch such stock or other property was ac-
qured durng a consodated Income or e cess profts ta return perod,
whether n compete or parta qudaton or otherwse, but ncudng as
such stock the stock acqured from another member wth a bass de-
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S 730.
150
termned under secton 113(a)(7) of the Code, or a correspondng secton
of pror revenue aws, f, mmedatey pror to the transfer, such stock
was hed by snch other member wth a bass by reference to whch ths
Inferor subdvson (secton 33.31(6) (2) (v) (G)) woud be appcabe, and
ncudng as such stock the stock acqured n a qudaton sub|ect to the
provsons of secton 112(b)(6) of the Code, or a correspondng secton
of pror revenue aws, f, mmedatey pror to such qudaton, the stock
of the qudated corporaton was hed by the dstrbutee, or the stock
acqured n such qudaton was hed by the qudated corporaton, wth
a bass by reference to whch ths nferor subdvson woud be appca-
be), there sha be e cuded as of the date on whch such corporaton
became a member of the group wthn the meanng of secton 730(d) that
porton of ts average nvested capta attrbuted to the shares of stock
so hed; there sha aso be e cuded, as of the date of any subsequent
acquston, that porton of ts average nvested capta attrbutabe to
shares of stock smary acqured and hed by other members of the
group; no addton sha be made on account of money or property (not
ncudng stock of another member of the group hed wth a bass by
reference to whch (F) s appcabe) thereafter pad n for stock hed
by any other member of the group or as pad-n surpus or a contrbuton
to capta pad n wth respect to shares of stock sub|ect to the provsons
of ths paragraph; and no reducton sha be made on account of any
dstrbuton thereafter made to any other member of the group; stock
of one member of the group Indrecty acqured or hed through the ac-
quston or ownershp of stock of another member of the group (not
ncudng stock ndrecty acqured or hed through the acquston or
ownershp of stock n a member whch owns, drecty or ndrecty, stock
n the acqurng corporaton) sha, to the e tent the stock of such other
member s of the character descrbed n ths paragraph, be deemed to be
of the same character: thus, f the P Corporaton acqures for cash a
the stock of the S1 Corporaton whch n turn owns a the stock of the
S1 Corporaton, the consodated average nvested capta of the P-S -S
group w be the average nvested capta of the P Corporaton (pus ts
accumuated earnngs and profts and any earnngs and profts accumu-
ated by S1 and S1 after acquston by P) regardess of the manner n
whch S1 acqured the stock of S ;
( ) y strkng out nferor subdvson ( ) of subparagraph
(2) (v), and by nsertng n eu thereof the foowng:
( ) In the case of a member of the affated group the stock of whch s
hed by other members of such group wth a bass for determnng oss upon
a sae or e change not f ed, ether drecty or ndrecty, by reference to the
bass of such stock, or of other property, n the hands of any precedng owner
(not ncudng as a precedng owner a member or former member of the group
from whch such stock or other property was acqured durng a consodated
ncome or e cess profts ta return perod, whether n compete or parta
qudaton or otherwse, but ncudng as such stock the stock acqured from
another member wth a bass determned under secton 113(a)(7) of the Code,
or a correspondng secton of pror revenue aws, f, mmedatey pror to the
transfer, such stock was hed by such other member wth a bass by reference
to whch ths nferor subdvson (secton 33.31(6) (2) (v) ( )) woud be ap-
pcabe, and ncudng as such stock the stock acqured n a qudaton sub-
|ect to the provsons of secton 112(b)(6) of the Code, or a correspondng
secton of pror revenue aws, f. Immedatey pror to such qudaton, the
stock of the qudated corporaton was hed by the dstrbutee, or the stock
acqured n such qudaton was hed by the qudated corporaton, wth a
bass by reference to whch ths nferor subdvson woud be appcabe),
there sha be e cuded as of the date on whch such corporaton became a mem-
ber of the group wthn the meanng of secton 730(d) that porton of ts
earnngs and profts, or defct n earnngs and profts, prevousy accumuated
and propery aocabe to the shares of stock so hed; there sha aso be e -
cuded, as of the date of any subsequent acquston, any earnngs and profts,
or defct n earnngs and profts, prevousy accumuated and propery ao-
cabe to any shares of stock smary acqured and hed by other members
of the group; and stock of one member of the group ndrecty acqured or
hed through the acquston or ownershp of stock of another member of the
group (not ncudng stock ndrecty acqured or hed through the acqus -
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151
f 730.
ton or ownershp of stock In a member whch owns, drecty or ndrecty,
stock n the acqurng corporaton) sha, to the e tent the stock of such other
member s of the character descrbed In ths paragraph, be deemed to be of the
same character;
(F) y strkng out subdvson (v)(C) of subparagraph (2) and
nsertng n eu thereof the foowng:
(C) Wth respect to dstrbutons from such accumuated earnngs and
profts made durng the ta abe year by one member of the affated group
to another member of the group, such accumuated earnngs and profts of
the dstrbutee sha be ncreased n an amount equa to that by whch
such accumuated earnngs and profts of the dstrbutor are decreased.
(G) y strkng from subdvson (v) (F) of subparagraph (2) the
e presson (b)(v)(F) and nsertng n eu thereof (b) (2) (v)
(G).
( ) y changng subdvsons (v), (v), (v), and ( ) of sub-
paragraph (2) to read, respectvey, ( ), ( ). ( ), and ( ), and
by nsertng mmedatey after subdvson (v)(G) of such subpara-
graph the foowng:
(v) In the computaton of new capta for any day of a ta abe year
begnnng after December 31, 10 0, the ad|ustments provded n secton
718(a)(6) (D), ( ),and (F) sha be dsregarded ;
(v) In the computaton of equty nvested capta (whch, under ths
secton, may be a mnus amount), effect sha be gven to the ad|ustments
prescrbed In ( )(2)(v) of ths secton (reatng to the computaton of
average nvested capta) to the e tent that such ad|ustments pertan to
the computaton of equty Invested capta;
(v) In the computaton of borrowed capta, there sha be e cuded
the amount of any outstandng ndebtedness of the corporaton owng to
another member of the affated group;
( ) In the computaton of dstrbutons from earnngs and profts for the
purposes of new capta computatons, Intercompany dstrbutons sha be
dsregarded;
(I) y strkng from subparagraph (G) the e presson (a) (31)
() and nsertng n eu thereof (a) (32) (), and by nsertng
mmedatey precedng the perod at the end of such subparagraph
the .foowng: but wth ts net ncome computed sub|ect to the
provsons of (b) (1) () of ths secton.
( ) y strkng from subparagraph (7) the e presson (a) (31)
() and (v) and nsertng n eu thereof (a) (32) () and (v).
Par. 5. Secton 33.33 s amended as foows:
( ) y changng the tte thereof to read: Gan or Loss From
Sae of Stock, or onds or Other Obgatons.
( ) y strkng out the e presson, any bond or obgaton ssued
by another corporaton and nsertng n eu thereof the foowng:
any bond or other obgaton ssued or ncurred by another corpo-
raton.
(C) y strkng out the frst parenthetca e presson appearng
n paragraph (a) and nsertng n eu thereof the foowng:
(by sae, or In compete or parta qudaton not Invovng cash n an amount
n e cess of the ad|usted bass of both the stock and the bonds and other ndebted-
ness qudated, or otherwse).
(D) y strkng from the parenthetca e presson appearng n
paragraph (c) the ast three words and nsertng n eu thereof the
foowng: stock, or bonds or other obgatons.
Par. 6. Secton 33.3 (c) s amended by strkng from subparagraph
(I) the words or e cess profts.
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730.
152
Par. 7. Secton 33.35 s amended to read as foows:
Sec. 33.35. Sae of onds or Other Obgatons ass for Determnng Gan
or Loss.
In the case of a sae or other dsposton by a corporaton, whch s (or has
been) a member of an affated group whch makes (or has made) a conso-
dated ncome or e cess profts ta return for the ta abe year 1929 or any sub-
sequent ta abe year, of bonds or other obgatons ssued or ncurred by another
member of such group (whether or not ssued or ncurred whe t was a mem-
ber of the group and whether ssued or ncurred before, durng, or after the
ta abe year 1929), the bass of each bond or obgaton, for determnng the
gan or oss upon such sae or other dsposton, sha be determned n accord-
ance wth the Code (see, partcuary, secton 113), but the amount of any oss
otherwse aowabe sha be decreased by the e cess (f any) of the aggregate
of the deductons computed under paragraph (c)(2) of secton 33.3 over the
sum of the aggregate bases of the stock of the debtor corporaton as computed
under paragraph (c)(1) or (d), as the case may be, hed by the members of
the group. (See, aso, secton 33. 0, reatng to dsaowance of oss upon
ntercompany bad debts.)
Par. 8. Secton 33.36 s amended by changng the tte thereof to
read: Lmtaton on owabe Losses on Sae of Stock, or onds
or Other Obgatons.
Par. 9. Secton 33.37(a) s amended by strkng out the frst para-
graph and nsertng n eu thereof the foowng:
Gan or oss sha not be recognzed upon a dstrbuton durng a consodated
return perod, by a member of an affated group to another member of such
group, n canceaton or redempton of a or any porton of ts stock, e cept
(1) Where such dstrbuton s n compete qudaton and redempton of a
of ts stock (whether n one dstrbuton or a seres) and of ts bonds and other
ndebtedness, f any, fas wthout the provsons of secton 112(b)(6), and s
the resut of a bona fde termnaton of the busness and operatons of such
member of the group, n whch case t sha he treated as a sae of the stock,
or bonds or other Indebtedness, the ad|ustment specfed n sectons 33.3 and
33.35 w be made, and secton 33.36 w be appcabe; or
(2) Where such a dstrbuton wthout the provsons of secton 112(b)(6)
s one made n cash n an amount n e cess of the ad|usted bass of the stock,
and bonds and other ndebtedness, n whch case gan sha be recognzed to the
e tent of such e cess.
Par. 10. Secton 33.38(c) (3) s amended by strkng out the porton
precedng the numbered subdvsons and by nsertng n eu thereof
the foowng:
Where property s acqured durng a ta abe year begnnng after December 31,
1939, upon a dstrbuton (not a compete qudaton wthn the provsons of
secton 112(b)(6)) n whch gan or oss to the dstrbutee s not recognzed
as provded n secton 33.37(a), the bass of such property sha be the same
as the bass (determned n accordance wth sectons 111 to 115, Incusve, and
sectons 33.3 and 33.35) of the stock and the bonds and other obgatons
e changed therefor, ad|usted
Par. 11. Secton 33. 0 s amended as foows:
( ) y strkng at the end of paragraph (a) the words any other
member of the group. and nsertng n eu thereof the foowng:
any other corporaton whch was a member of the group as of the ast day of
the ta abe year or whch was qudated by the group durng such year e cept
as a oss n connecton wth a qudaton of such other member n whch osses
are recognzed pursuant to secton 33.37(a).
( ) y strkng the parenthetca e presson at the end of para-
graph (b) and nsertng n eu thereof: (See secton 33.35.)
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153
Regs. 109, 30.73 -1.
Par. 12. Secton 33. 1 ( ) s amended by nsertng mmedatey pre-
cedng the words n determnng the gan or oss to the ssung
company the foowng:
and n a tra:.sacton other than a dstrbuton In a qudaton n whch gan or oss
to the dstrbutee s recognzed pursuant to secton 33.37(a),
(Ths Treasury decson s ssued under the authorty contaned n
secton 730(b) of the Interna Revenue Code, added by the cess
Profts Ta ct of 19 0 (5 Stat., 989), and sectons 201, 203, 20 ,
and 205 of the Revenue ct of 19 1 (Pubc aw 250, Seventy-seventh
Congress).)
Norman D. Cann,
ctng Commssoner of Interna Revenue.
pproved March 5, 19 2.
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster March 6.19 2, p.m.)
S CTION 73 . D USTM NT IN C S OF POSITION IN-
CONSIST NT WIT PRIOR INCOM T LI ILITY.
Reguatons 109, Secton 30.73 -1: Purpose 19 2-5-10980
and scope of secton 73 . T. D. 5112
( so Reguatons 109, Secton 30.73 -2.)
TITL 26 INT RN L R NU . C PT R I, SU C PT R . P RT 30. C SS
PROFITS T .
mendng sectons 30.73 -1 and 30.73 -2 of Reguatons 109.
Treasury Department,
Offce of Commssoner of Interna Revenue.
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
Reguatons 109 Part 30, Tte 26, Code of Federa Reguatons,
19 1 Sup. are amended as foows:
Paragraph 1. Secton 30.73 -1 (b), as added by Treasury Decson
50 5, approved May 3,19 1 C. . 19 1-1, 69 , s amended by strkng
out subdvson (2) and nsertng n eu thereof the foowng:
(2) The term predecessor means a person (other than the ta payer) who
has transferred property
(1) whch, for ncome ta purposes for any ta abe year, has at any
tme been treated, or
() whch s treated for e cess profts ta purposes,
as havng. In the hands of the ta payer (or In the hands of a predecessor of
the ta payer under the defnton contaned n ths paragraph, but wthout
regard to cause () of that defnton) a substtuted bass determned drecty
or ndrecty by reference to the bass n the hands of such person.
Par. 2. Secton 30.73 -2 (c), as added by Treasury Decson 50 5,
s amended by nsertng mmedatey after the second paragraph the
foowng new paragraphs:
Nether the Commssoner nor the ta payer s requred to adopt an nconsst-
ent poston wth respect to the treatment of an tem or transacton n the
determnaton of the e cess profts credt because of the fact that such tem
7 918
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3798.
15
or transacton was Incorrecty treated In the determnaton of the ncome ta
abty of the ta payer, or a predecessor, for a pror ta abe year or years,
under the aw appcabe to such year or years. Such tem or transacton may,
n the determnaton of the e cess profts credt, be treated n a manner con-
sstent wth the ncorrect treatment accorded n the determnaton of the
ncome ta abty f nether the Commssoner nor the ta payer ob|ects.
ther the Commssoner or the ta payer, however, may nsst upon the correct
treatment of such tem or transacton n the determnaton of the e cess profts
credt under the aw appcabe to the e cess profts ta ta abe year, but such
acton consttutes the mantenance of an nconsstent poston and w resut
n an ad|ustment under secton 73 , f the party nsstng upon such treatment
Is the party who woud be adversey affected by such ad|ustment.
ta payer whch has taken an nconsstent poston wth respect to an tem
or transacton affectng the determnaton of ts e cess profts credt may, upon
notce to the Commssoner n wrtng, wthdraw from such poston.
(Ths Treasury decson s ssued under the authorty contaned n
secton 62 of the Interna evenue Code (53 Stat., 32; 26 U. S. C,
Sup. , 62), as made appcabe by secton 729 of the Interna Reve-
nue Code, added by the Second Revenue ct of 19 0 (Pubc, No. 801,
Seventy-s th Congress, thrd sesson), and secton 73 of the Interna
Revenue Code as added by secton 11 of the cess Profts Ta
mendments of 19 1 (Pubc aw 10, Seventy-seventh Congress).)
Norman D. Cann,
ctng Commssoner of Interna Revenue.
pproved anuary 26, 19 2.
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster anuary 28,19 2, 11 a. m.)
Reguatons 109, Secton 30.73 -2: Crcumstances of
ad|ustment.
INT RN L R NU COD .
Reguatons 109, amended. (See T. D. 5112, page 153.)
C PT R 38. MISC LL N OUS PRO ISIONS.
S CTION 3798. MPTION OF INSOL NT
N S FROM T .
19 2-2-10955
G. C. M. 22985
INT RN L R NU COD ND R NU CT OF 192 .
Cams of genera credtors of an nsovent State bank n Te as
are on a party wth cams of depostors wthn the meanng of
secton 6 .1 6) of Treasury Decson 9 8 (C. . 19 0-1, 7 ).
owever, secton 37P8 of the Interna Revenue Code reatng to
the Immunty of nsovent banks s for the beneft of depostors and
not for genera credtors, and the reason for deferrng ta cams
of the Government no onger e sts after n depostors have been
pad n fu even though some of the other credtors have not been
pad n fu.
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155
3798.
S. M. 86 (C. . I -2, 9 (1925)) modfed to the e tent that It
s n confct wth secton 6 .11(6) of Treasury Decson 958 or
wth concusons reached heren.
n opnon s requested as to the appcabty of secton 3798 of
the Interna Revenue Code and Treasury Decson 958 (C. . 19 0-1,
7 ) reatng to the mmunty of nsovent banks to stuatons n the
State of Te as where a of the depostors have been pad n fu
but some of the credtors have not been pad n fu. The questons
presented nvove (1) rghts of prorty between depostors and gen-
era credtors of nsovent banks n the State of Te as and (2) the
mport of the words appcabe aw as used n secton 6 .11(6)
of Treasury Decson 958.
Secton 6 .11(6) of Treasury Decson 958 provdes as foows:
Genera credtors. Whe the Immunty from ta coecton s for protecton
of depostors, and not for the 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 n fu t s necessary to pay a credtors n fu. Itacs
supped.
The words appcabe aw as used n secton 6 .11(6) of
Treasury Decson 958, quoted above, are construed by the ureau
to refer to an appcabe Federa or State statute, or prncpe of
aw, whch has been accepted by the Federa or State courts. It has
been concuded from a study of the decsons of the Te as courts
that t shoud be hed n cases nvovng nsovent State banks n
Te as, that the cams of genera credtors of such banks are on a
party wth the cams of genera depostors wthn the meanng of
secton 6 .11(6) of Treasury Decson 958, supra.
It shoud be noted however that the purpose or secton 6 .11(6)
of Treasury Decson 958, supra, s to prevent a staemate n the
payment of the cams of depostors of an nsovent bank whch
mght resut from the fact that the qudator of such a bank was
faced, on the one hand, wth the requrement of a Federa statute
that ta cams of the Federa Government be pad n preference to
the cams of credtors of the bank, and on the other hand, wth the
requrement of a State statute that credtors of the bank share equay
wth depostors n the dstrbuton of the assets of the bank. c-
cordng where the depostors of an nsovent bank have been pad
n fu wthout recourse, even though some, or a of the credtors
of the bank have not been pad n fu, the necessty for concedng
the rght of the unpad credtors to be pad n fu, before the ta
cams of the Federa Government are satsfed, no onger e sts, and
n such cases the cams of the Federa Government shoud be gven
prorty over the cams of such unpad credtors.
S. M. 86 (C. . I -2, 9 (1925)), whch hods n part that Fed-
era statutes controng assessment, coecton, and payment of Fed-
era ta es may not be affected by State egsaton, and that a State
may not prevent the coecton of Federa ta es by egsaton dstrb-
utng the proceeds of nsovent banks n such a manner so as to
|eopardze the prorty rght of payment provded bv Federa statute,
or sancton assessment and/or coecton of Federa ta es whch the
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23(e), rt. 23(e)- .
156
ct of March 1, 1879 (20 Stat., 351, secton 3798 I. R. C), has pro-
hbted or curtaed, s modfed to the e tent that t s n confct wth
secton 6 .11(6) of Treasury Decson 958, or wth the concusons
reached n ths memorandum.
. P. Wfnche,
Chef Counse, ureau of Interna Revenue.
. R NU CT OF 1938.
SU TITL G N R L PRO ISIONS.
P RT II. COMPUT TION OF N T INCOM .
S CTION 23(c). D DUCTIONS FROM GROSS
INCOM : T S G N R LLY.
rtce 23 (c)-: Ta es.
R NU CT OF 1938.
Gasone and motor fue ta es mposed by the State of Lousana.
G. C. M. 8936 (C. . -, 110 (1931)) and G. C. M. 1 970 (C. .
I -2, 69 (1935)) revoked. (See G. C. M. 22998, page 50.)
rtce 23(c)-1 : Ta es.
R ND CT OF 1038.
Certan Lousana gasone and motor fue ta es. Retroactve
appcaton of G. C. M. 22998 page 50, ths uetn . See I. T. 3526,
page 52.)
S CTION 23(e). D DUCTIONS FROM GROSS INCOM :
LOSS S Y INDI IDU LS.
rtce 23(e)-: Losses by ndvduas. 19 2-13-11038
I. T. 35
R NU CT OF 1038.
oss sustaned upon the sae of resdenta property acqured
by the ta payer for renta purposes and so used for severa years, but
whch was ater occuped by hm as hs persona resdence and was
so used at the tme of sae, s not deductbe for Federa ncome ta
purposes.
dvce s requested as to the aowabe oss, f any, for Federa n-
come ta purposes, on the sae of rea property whch was acqured
by and hed by hm for severa years for proft, but whch was for
severa years thereafter and up to the tme of ts sae used as hs
persona resdence wth permanent or ndefnte abandonment of the
proft motve durng such use.
The rea property n queston was purchased by , the ta payer
(not engaged n the rea estate busness), n 1928 for renta purposes
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157
23(e), rt. 23(e)-.
at a cost of 25,000. Deprecaton of 1,800 was aowabe from the
date of purchase to anuary 1, 1935, on whch date the property was
occuped by the ta payer as hs persona resdence. The far market
vaue on anuary 1,1935, was 22,000. On anuary 1, 1938, the prop-
erty was sod for 16,000. Thus, a oss was sustaned through the
sae, a part of whch was attrbutabe to the perod durng whch the
property was rented and a part to the perod durng whch t was
used as a persona resdence. The nqury presented s whether the
oss, or any porton thereof, s aowabe as a deducton.
Secton 23(e)2 of the Revenue ct of 1938 provdes that n com-
putng net ncome there sha be aowed as deductons:
(e) Losses by Indvduas. In the case of an ndvdua, osses sustaned
durng the ta abe year and not compensated for by nsurance or otherwse

(2) f ncurred n any transacton entered nto for proft, though not
connected wth the trade or busness .
rtce 23(e)- of Reguatons 101 provdes n part as foows:
oss on the sae of resdenta property purchased or constructed by the
ta payer for use as hs persona resdence and so used by hm up to the tme
of the sae s not deductbe. If, however, property so purchased or constructed
s pror to ts sae rented or otherwse approprated to ncome-producng pur-
poses and s used for such purposes up to the tme of ts sae, a oss from the
sae of the property, computed as provded n secton 111, s, sub|ect to the
mtatons provded n secton 117, an aowabe deducton n an amount not
to e ceed the e cess of the vaue of the property at the tme t was approprated
to ncome-producng purposes (wth proper ad|ustment for deprecaton) over
the amount reazed from the sae. Itacs supped.
In Dr. . C. aoeh v. Commssoner ( . T. . memorandum
opnon, September 26, 19 1) the pettoner, n a transacton entered
nto for proft n 1925, acqured resdenta property for nvestment
and to produce renta ncome. The property was rented from about
the date of purchase to 1930 when t became vacant, and a short tme
thereafter pettoner and hs famy moved nto t and contnued to
make t ther home unt 1937, when he purchased another resdence
and sod the one he had been occupyng. fter pettoner moved out
the house was not agan rented. The oard of Ta ppeas n ts
opnon stated n part as foows:
It s true that when pettoner purchased ths resdenta property n 1925
he purchased t for the purpose of Investment. e ntended to rent t and
thereby make t ncome producng property. e dd rent t and receved ncome
therefrom for a consderabe perod. owever, n 1030 t became vacant and
pettoner and hs famy moved nto t as ther own prvate resdence. They
contnued to ve there unt 1937 when they decded to acqure a new home.
When pettoner acqured hs new home he sod the od one n whch he had
been vng for appro matey seven years. Under these crcumstances we thnk
the nstant case fas wthn the ambt of such cases as R. C. nyss (35 . T. .,
1128) ; Dupuy O. Warrck ( . T. ., 1068). In the atter case we sad, bearng
upon the sub|ect of the sae of property whch at the tme of sae was beng
used as resdenta property, as foows:
s a resut of ts contnued use as such, the purchase and sae of ths
property ost the characterstcs of a transacton entered nto for proft, even
though a prrft makng motve may have e sted at the tme of ts acquston.
R. C. ayss, supra.) Respondent dd not err n dsaowng the deducton of
5,500 as a oss ncurred n a transacton entered nto for proft.
We sustan the Commssoner n hs dsaowance of ths camed oss.
The oard of Ta ppeas n the aock case hed, therefore, that
by reason of the use by pettoner of the property there nvoved for
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23(m), rt. 23(m)-16.
158
seven years as hs prvate resdence the orgna transacton by whch
he acqured such property for renta purposes ost the characterstcs
of a transacton entered nto for proft, and that the oss sustaned
from dsposton of the property was not a proper deducton under
the provsons of secton 23(e)2 of the Revenue ct of 1936. The
anguage of secton 23(e)2 of the Revenue ct of 1936 s the same as
that of secton 23(e)2 of the Revenue ct of 1938, supra, appcabe
to the nstant case.
ppyng the prncpe of the aock case, supra, to the facts pre-
sented n the nstant case, t s hed that no porton of the oss sus-
taned upon sae of the property here nvoved s aowabe as a deduc-
ton under the provsons of secton 23(e) 2 of the Revenue ct of
1938, supra, snce the orgna transacton by whch the ta payer
acqured the property had, pror to the sae, ost the characterstcs
of a transacton entered nto for proft. (See aso Loyd ones v.
Commssoner (39 . T. ., 531, nonacquescence as to another ssue,
C. . 1939-2, 55).)
S CTION 23 (k). D DUCTIONS FROM GROSS
INCOM : D D TS.
rtce 23(k)-: ad debts.
R NU CT OF 1938.
cceptance by credtor of vountary conveyance of property, n-
cudng property pedged as securty for the debt, n parta or n
fu satsfacton of the unpad porton of the ndebtedness. (See
I. T. 35 8, page 7 .)
S CTION 23 (m). D DUCTIONS FROM GROSS
INCOM : D PL TION.
rtce 23(m)-16: Charges to capta and to e pense
n the case of o and gas wes.
R NU CT OF 1038.
ppcabty of opton to e pense drng costs n connecton wth
varous knds of drng contracts. (See G. C. M. 2303 , page 75.)
rtce 23(m)-16: Charges to capta and to e pense
n the case of o and gas wes.
R NU CT OF 1038.
ppcabty of opton to e pense drng costs n connecton wth
varous knds of drng contracts. (See G. C. M. 232 3, page 78.)
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159 101, rt. 101-1.
S CTION 23(o). D DUCTIONS FROM GROSS INCOM :
C RIT L ND OT R CONTRI UTIONS.
rtce 23(o)-1: Contrbutons or gfts by ndvduas.
R NU CT OF 1938.
Contrbutons to the Navy Reef Socety. (See I. T. 3550, page 1G .)
S CTION 23(q). D DUCTIONS FROM GROSS INCOM :
C RIT L ND OT R CONTRI UTIONS
Y CORPOR TIONS.
rtce 23(q)-: Contrbutons or gfts by corporatons.
R NU CT OF 1038.
Contrbutons to the Navy Reef Socety. (See I. T. 3550, page 10 .)
P RT IW- CCOUNTING P RIODS ND M T ODS OF CCOUNTING.
S CTION . INST LLM NT SIS.
rtce - : Deferred-payment sae of rea property
not on nstament pan.
R NU CT OF 1938.
Reguatons 101, amended. (See T. D. 5113, page 88.)
P RT . R TURNS ND P YM NT OF T .
S CTION 55. PU LICITY OF R TURNS.
R NU CT OF 1938.
Reguatons governng the nspecton of corporaton statstca
transcrpt cards by the Offce of Prce dmnstraton. (See T. D.
5120, page 97.)
SU TITL C SUPPL M NT L PRO ISIONS.
SUPPL M NT . R T S OF T .
S CTION 101. MPTIONS FROM T
ON CORPOR TIONS.
rtce 101-1: Proof of e empton.
R NU CT OF 1938.
Proof requred for certan casses of corporatons. (See T. D. 5125,
page 101.)
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5 115, rt. 115-7.
160
rtce 101(6)-1: Regous, chartabe, scentfc,
terary, and educatona organzatons and com-
munty chests.
R NU CT OF 1938.
Corporaton organzed for the purpose of, and engagng n, bus-
ness actvty. (See G. C. M. 23063, page 103.)
rtce 101(6)-1: Regous, chartabe, scentfc,
terary, and educatona organzatons and com-
munty chests.
R NU CT OF 1938.
Navy Reef Socety. (See I. T. 3550, page 10 .)
SUPPL M NT . COMPUT TION OF N T INCOM .
S CTION 113(a). D UST D SIS FOR D T RMINING
G IN OR LOSS: SIS (UN D UST D) OF PROP RTY.
rtce 113(a) (2)-: Property transmtted by gft after
December 31, 1920.
R NU CT OF 1938.
Reguatons 101, amended. (See T. D. 5137, page 110.)
rtce 113(a) (3)-: Transfer n trust after December 31, 1920.
R NU CT OF 1938.
Reguatons 101, amended. (See T. D. 5137, page 110.)
S CTION 115. DISTRI UTION Y CORPOR TIONS.
rtce 115-7: Stock dvdends. 19 2- -10972
T. D. 5110
TITL 20 INT RN L R NU C PT R I, SU C PT R . P RTS 3 ND 9.
INCOM T .
Reguatons 9 and 101 amended. Stock dvdends and stock
rghts.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. O.
To Coectors of Interna Revenue and Others Concerned:
rtce 115-7 of Reguatons 9 secton 3.115-7, Tte 26. Code of
Federa Reguatons and artce 115-7 of Reguatons 101 secton
9.115-7, Tte 26, Code of Federa Reguatons, 1939 Sup. are each
amended by strkng out a of the matter appearng after the frst
sentence thereof.
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161
131, rt. 131-8.
(Ths Treasury decson s ssued under the authorty contaned n
secton 62 of the Revenue ct of 1936 ( 9 Stat., 1673, 26 U. S. C. Sup.
(2) and secton 62 of the Revenue ct of 1938 (52 Stat., 80, 26
U. S. C, Sup. 62).)
Gut T. everng,
Commssoner of Interna Revenue.
pproved anuary 19, 19 2.
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster anuary 20, 19 2, 3.58 p. m.)
S CTION 117. C PIT L G INS ND LOSS S.
btce 117-1: Meanng of terms.
R NU CT OF 1938.
cceptance by credtor of vountary conveyance of property, n-
cudng property pedged as securty for the debt, n parta or n
fu satsfacton of the unpad porton of the ndebtedness. (See
I. T. 35 8, page 7 .)
SUPPL M NT C CR DITS G INST T .
S CTION 131. T S OF FOR IGN COUNTRI S ND
POSS SSIONS OF UNIT D ST T S.
btce 131-8: Lmtatons on credt for 19 2-2 -1112
foregn ta es. Ct. D. 1561
ncome ta revenue acts of 1936 and 1938 decson of su reme court.
1. Credts ganst Ta Credt owabe to Domestc Corpora-
ton for Ta es Pad by Foregn Subsdary.
domestc corporaton recevng dvdends from a foregn subsd-
ary s entted, under secton 131(f) of the Revenue cts of
1936 and 1938, to a ta credt on account of foregn ncome ta es
pad by the subsdary upon or wth respect to ts accumuated
profts, mted to the proporton of the tota foregn ta es pad by
the subsdary whch ts accumuated profts bear to the tota
profts, whch accumuated profts, by defnton, are Its tota ta -
abe profts ess ta es pad.
2. Reguatons Power or Commssoner to Pbomu ate Regua-
ton Changng, for the Future, an arer Practce.
ntecedent admnstratve nterpretaton ong n force, under
whch a dfferent method of computng credt was provded, does not
render t mpossbe for the Commssoner to promugate n regua-
ton changng, for the future, the earer practce. The new regua-
ton defntey governs ths case, was made pror to the years In
controversy, and comports wth the pan meanng of the statute.
3. Decson ffrmed.
Decson of the Court of Cams (19 1) ( 1 Fed. Supp., 537)
affrmed.
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131, rt. 131-8.
162
Supreme Court of the Unted States.
mercan Chce Co., pettoner, v. The Unted States.
On wrt ot certorar to the Court of Cams.
une 1, 19 2.
OPINION.
Mr. ustce Roberts devered the opnon of the Court.
Ths case Invoves the appcaton of secton 131(f) of the Revenue cts of
1936 and 19381 whch aows a ta credt to domestc corporatons In respect of
Income receved from foregn subsdares.
Durng the ta abe years 1936, 1937, and 1938, the pettoner, a domestc cor-
poraton, receved dvdends from foregn subsdares of whch t was soe stock-
hoder. The subsdares pad ta es upon ther earnngs to the countres of ther
domce. In Its ncome ta returns the pettoner camed the credt aowed
by secton 131 for the foregn ta es so pad. The Commssoner of Interna
Revenue computed the credt at a ess sum than that the pettoner camed. The
pettoner pad the resutant ta es and presented cams for refund, whch were
re|ected. Ths acton was brought n the Court of Cams for asserted overpay-
ments.
The soe matter n controversy s the proper method of arrvng at the credt
granted by secton 131. That secton permts a domestc corporaton to credt
aganst Its ta the amount of Income, war-profts, and e cess-profts ta es pad
or accrued durng the ta abe year to any foregn country, wth certan mts
set by subsectons (b) (1) and (2). The purpose of the provson, ke that of
ts predecessor, secton 238 of the Revenue ct of 1921, s to obvate doube ta a-
ton.
Secton 131(f), deang wth ta es of a foregn subsdary, provdes that, for
the purpose of the secton, a domestc corporaton recevng dvdends from such
a subsdary n any ta abe year sha be deemed to have pad the same pro-
porton of any ncome, war-profts, or e cess-profts ta es pad by the subsdary
to a foregn country, upon or wth respect to the accumuated profts of the
subsdary from whch such dvdends were pad, whch the amount of such
dvdends bears to the amount of such accumuated profts. ccumuated
profts of the subsdary are defned as the amount of ts gans, profts, or
ncome n e cess of the Income, war-profts, and e cess-profts ta es mposed
upon or wth respect to such profts or ncome.
The partes are n agreement as to the fracton to be used n cacuatng the
proporton. The numerator s the dvdends receved by the parent. The denom-
nator Is the accumuated profts of the subsdary. The d pute reates to
the mutpcand to whch the fracton Is to be apped. The pettoner says
t s the tota foregn ta es pad by the subsdary. The respondent says t s
the ta es pad upon or wth respect to the accumuated profts of the subsdary;
. e., so much of the ta es as s propery attrbuted to the accumuated profts,
or the same proporton of the tota ta es whch the accumuated profts bear to
the tota profts. The Court of Cams so hed. Snce severa decsons have
gone the other way, we granted certorar.
If the anguage of the Revenue ct s to be gven effect, the Government s vew
seems correct. The statute does not purport to aow a credt for a stated pro-
porton of the tota foregn ta es pad or the foregn ta es pad upon or wth
respect to tota foregn profts, but for ta es pad upon or wth respect to
the subsdary s accumuated profts, whch, by defnton, are ts tota ta abe
profts ess ta es pad.
If, as s admtted, the purpose s to avod doube ta aton, the statute, as
wrtten, accompshes that resut. The parent receves dvdends. Such dv-
dends, not ts subsdary s profts, consttute ts ncome to be returned for ta aton.
9 Stat., 1S S, 1606 ; 52 Stat.. 7, 506 ; 26 D. S. C, secton 131.
2 Stat, 227. 258.
urnet v. Chcago Portrat Co. (285 U. S., 1).
foregn corporaton of whose votng stock the ta payer owns a ma|orty.
1 Fed. Supp., 537.
F. W. Wootcorth Co. v. Unted States (91 Fed. (2d). 973) ; Internatona Mng Co. v.
Unted States (89 C. Cs., 128, 27 Fed. Supp., 592) ; umnum Co. of merca v. Unted
States (123 Fed. (2d), 615).
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163
5 131, rt. 131-8.
The subsdary pays ta on, or n respect of, ts entre profts; but, snce the
parent receves dstrbutons out of what s eft after payment of the foregn ta
that s, out of what the statute cas accumuated profts, t shoud receve a
credt ony for so much of the foregn ta pad as reates to or, as the ct says,
s pad upon, or wth respect to, the accumuated profts.
ence we thnk that, under the pan terms of the ct, the Commssoner and
the court beow were rght n mtng the credt by the use as mutpcand of a
proporton of the ta pad abroad appropratey refectng the reaton of accu-
muated profts to tota profts of the subsdary. ut the pettoner nssts that
the egsatve hstory and a ong Induged admnstratve constructon requre
us, n effect, to ede the phrase upon or wth respect to the accumuated
profts of the foregn subsdary.
Secton 2- 0(c) of the Revenue ct of 1918 aowed the domestc parent recev-
ng dvdends from a foregn subsdary a credt for the same proporton of the
ta es pad by the foregn corporaton durng the ta abe year to any foregn
country whch the amount of the dvdends receved by the parent durng the ta -
abe year bore to the tota ta abe ncome of the subsdary upon or wth respect
to whch such ta es were pad.
Ths provson had the same ob|ect as secton 131 of the Revenue cts of 1936
and 1938; that s, to avod doube ta aton. The dffcuty wth t was that t dd
not reate the credt to the accumuated profts or surpus of the subsdary out of
whch the dvdends were pad. Thus, f dvdends were pad out of surpus earned
n pror years, and It happened that the subsdary pad no ta to the foregn
country n the ta abe year In queston, the parent coud cam no credt whatever.
There were other eccentrc resuts fowng from the provson of the ct of 1918.
In the Revenue ct of 1921 secton 238(e) was the anaogous secton. The
draftsman of the secton stated to the Senate commttee n charge of the measure:
I rewrote the od provson, safeguardng t from some abuses whch t was open
to and cosng up some of the gaps that were n the od provson. Secton 238(e)
s substantay the same as secton 131(f). The ateratons of secton 2 0(c) of
the ct of 1918 were made to permt dentfcaton of the accumuated profts of
each ta abe year out of whch the dvdends mght have been pad and to gve
credt for a proporton of the subsdary s ta es attrbutabe to such accumuated
profts.
The charman of the Senate Fnance Commttee ndcated that the cacuaton
of the proporton of foregn ta pad woud be e acty the same as t had been
under the 1918 ct. ut ths woud be true ony f the dvdends were pad n a
gven year out of the pror year s earnngs and ta es were pad n the same year
n respect of the same pror year s earnngs. The pettoner seeks In ths case
to appy the proporton provded by the 1918 ct; but ths Is to gnore the atera-
tons made n that ct n 1921 whch have ever snce been retaned. In commt-
tee hearngs and n Congressona reports wth respect to the purpose and effect
of the changes wrought by the 1921 ct there were statements ndcatng an
understandng that the credt was to be proportoned to the dvdends made ava-
abe to the parent n ths country.
The Treasury made no reguaton appcabe to secton 238(e) of the Revenue
ct of 1921. It provded a form for reportng the ta , whch sanctoned the pet-
toner s method of computng the credt; and, from 1921 to 1930, the Commssoner
cacuated credts for foregn subsdares ta es by that method. In 1930, how-
ever, the Treasury promugated a new form whch requred the credt to be com-
puted n the way the Commssoner dd n the present case; and promugated
Reguatons 77 under the Revenue ct of 1932, whch, In artce 698, requred the
computaton of the credt n the same manner. The reguatons have snce re-
maned unchanged: See Reguatons 103 (sectons 19.131-3 and 19.131-8). -
though the reguatons defntey govern ts case, and were made pror to the
years n controversy, the pettoner nssts that the antecedent admnstratve
Interpretaton ong n force renders t mpossbe for the Commssoner to pro-
mugate a reguaton changng for the future the earer practce, even though the
new reguaton comports wth the pan meanng of the statute. We thnk the
contenton can not be sustaned.
The |udgment s affrmed.
Ch. 18. 0 Stat., 1057. 10 2.
Ch. 136. 2 Stnt.. 227. 253.
e vrrng v. Wtshre Co. (308 U. S., 90 Ct. D. 1 2 , C. . 1939-2. 213) ; everng
v. Reynod (313 U. S., 28) ; Whte v. Wnchester Country Cub (No. 83, October term,
19 1).
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22(a), rt. 22(a)-. 16
INCOM T RULINGS. P RT II.
R NU CTS OF 1937 ND 1936.
SU TITL . G N R L PRO ISIONS.
P RT II. COMPUT TION OF N T INCOM .
S CTION 22(a). GROSS INCOM : G N R L
D FINITION.
rtce 22(a)-: What ncuded n gross
ncome.
19 2-12-11033
Ct. D. 15 6
ncome ta revenue acts of 193 and 1936 decson of supreme court.
1. Gross Income Separaton oreement nnuty Contract
Income Ta abe to Wfe Loca Law urden of Proof.
Pursuant to an opton gven to the husband n a separaton agree-
ment entered nto n 1913 and amended n 1916, the arrangement
made theren for monthy payments to the wfe for fe was
termnated n 1917, soon after she had obtaned an absoute dvorce
n Te as, and the husband purchased an annuty contract provdng
for payment to the wfe of the same monthy sum for fe as had
been provded n the agreement. Nether amony nor a property
settement was mentoned n the dvorce decree. ed: The ncome
from the annuty contract consttutes ta abe ncome to the wfe,
where she has not sustaned the burden of showng that under the
Te as aw the court retaned the power to reaocate the ncome from
the contract or to contro t n any way as an ncdent of ts power to
requre the husband to support the wfe, or that the court mposed
a persona obgaton on the husband n respect to the settement
n queston. There s no barrer under the ncome ta aws to ta ng
the hoder of an annuty on the ncome receved, however hs
nterest n the fund whch produces the ncome may be descrbed.
2. Cases paned.
everng v. Ftch (309 U. S., 1 9) Ct. D. 1 39, C. . 19 0-1,165 ,
everng v. Leonard (310 U. S., 80) Ct. D. 1 5 . C. . 19 0-1,
1751, and everng v. Fuer (310 U. S., 69) Ct. D. 1 53, C. . 19 0-1,
172 , e paned.
3. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, Second
Crcut (120 Fed. (2d), 228) (19 1), affrmng decson of the Unted
States oard of Ta ppeas ( 2 . T. ., 91) (19 0), affrmed.
osephne S. Pearce, pettoner, v. Commssoner of Interna Revenue.
On wrt of certorar to the Unted States Crcut Court of ppeas for the Second Crcut.
Mr. ustce Dougas devered the opnon of the Court.
Pettoner and her husband separated n 1913. There was an agreement pro-
vdng for monthy payments by the husband for her support. That agreement
was amended n 1916 so as to provde monthy payments to her of 500 for fe.
er husband, however, was gven an opton to termnate the arrangement by
purchasng an annuty contract from a fe nsurance company whch woud
Supreme Court of the Unted States.
March 9, 19 2.
opnon.
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22(a), rt. 22(a)-.
pay pettoner 500 a month for the rest of her fe. In 1917 pettoner obtaned
an absoute dvorce n Te as, her husband enterng a persona appearance.
Nether amony nor a property settement was mentoned n the dvorce decree.
There were no chdren. Severa months after the dvorce Mr. Pearce pur-
chased an annuty from an nsurance company for pettoner s beneft. The
annuty provded for a payment of 500 per month durng her fe.
Nether pettoner nor Mr. Pearce ncuded the 6,000 receved by her under
the annuty contract n ther Federa ncome ta returns for 1935 and 1936.
The Commssoner sent defcency notces to both of them. ach appeaed to
the oard of Ta ppeas. t the hearng the Commssoner contended that the
payments were ncome of pettoner. The oard uphed that contenton. ( 2
. T. ., 91.) The crcut court of appeas affrmed the |udgment of the oard,
one |udge dssentng. (120 Fed. (2d), 228.) We granted the petton for
certorar because of the manner n whch that court apped the rue of ever-
ng v. Ftch (309 U. S., 1 9 Ct. D. 1 39, C. . 19 0-1, 165 ) and everng v.
Leonard (310 U. S., 80 Ct. D. 1 5 , C. . 19 0-1, 175 ) n case the e -wfe
rather than the husband was sought to be ta ed on aeged amony payments.
The crcut court of appeas reached the concuson that pettoner was abe
by the foowng ne of reasonng. The determnaton of the Commssoner
that the monthy payments were ncome of pettoner was presumptvey cor-
rect; the burden to show error rested on pettoner. (Wech v. everng, 290
U. S., I, 115 Ct. D. 755, C. . II-2, 112 (1933) .) rror mght be shown
by submttng cear and convncng proof heverng v. Ftch, supra, 156)
that the payments were made pursuant to a contnung obgaton of her former
husband to provde for her support, so as to make the rue of Dougas v. Wcuts
(296 D. S., 1 Ct. D. 10 1, C. . I -2, 250 (1935) ) appcabe. The burden
of estabshng error s not sustaned by a dvorced wfe merey by showng
that an obgaton of her former husband mght have contnued despte the
dvorce. Snce It s doubtfu and uncertan under Te as aw whether pet-
toner s former husband was dscharged of hs marta obgaton by the set-
tement In queston, pettoner faed to show that the presumptvey correct
determnaton that she was abe was erroneous.
We do not thnk that that was a correct appcaton of the rue of the Ftch
and Leonard cases. Those cases hod that the ncome s ta abe to the former
husband not ony where t s cear that payments to hs e -wfe were
made pursuant to a contnung abty created by hs contract or by
oca aw but aso where hs undertakng or oca aw makes that queston
doubtfu or uncertan. Those cases, ke Dougas v. Wcuts, supra, nvoved
stuatons where the dvorced husband was sought to be ta ed on payments
to hs e -wfe. ut the rue whch they e press suppes the crtera for deter-
mnng, n absence of a dfferent statutory formua, whether payments receved
by the e -wfe are propery ta abe to her or to her dvorced husband. If the
Commssoner proceeds aganst the e -wfe, she sustans her burden of rebuttng
hs presumptvey correct determnaton merey by showng doubts an uncer-
tantes as to whether the payments were made pursuant to her former husband s
contnung obgaton to support her. If the Commssoner proceeds aganst
her former husband he sustans hs burden by submttng cear and convncng
proof that the payments were not made pursuant to any such contnung ob-
gaton. everng v. Fuer, 310 U. 8., 69 Ct. D. 1 53, C. . 19 0-1, 172 .)
The other course woud make the abty of the dvorced wfe or the dvorced
husband whoy dependent on the eecton of the Commssoner to proceed aganst
one rather than the other where, for e ampe, oca aw was uncertan. ut
the rue of Dougas v. Wcuts, supra, rests on a more substanta bass. Its
roots are In oca aw and the undertakngs of the husband. It cas for the
use of the same crtera whether the husband or the wfe s sought to be ta ed.
We thnk, however, that pettoner has not mantaned her burden n ths case.
er former husband was not under a contnung contractua obgaton to con-
trbute to her support. For the agreement made n 1916 provded for the termna-
ton of hs persona obgaton to make payments to her n the event that he pur-
chased the desgnated annuty. nd so far as Te as aw s concerned, she has not
mantaned her burden. er showng as to Te as aw s ustrated by the
foowng.
y statute n Te as amony may be awarded durng the pendency of a sut for
a dvorce unt a fna decree sha be made n the case (13 ernon s Cv
Stats., artce 637.) Ths statute s e cusve n Its very nature, and no
amony can be decreed by any court n ths State e cept under ts e press terms.
(Martn v. Martn, 17 S. W. (2d), 789, 791-792.) It has been broady stated n
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22(a) rt. 22(a)- .
166
Phps v. Phps (203 S. W., 77, 79) that, In ths State the ega duty of the
husband to support hs wfe ceases upon the severance of the marta bonds, nor
has a court the power to decree that a husband or hs property may be sub|ected
to such support after dvorce. Permanent amony Is not provded for by Te as
statutes. nd see Pape v. Papc (13 Te . Cv. Rep., 99) ; oyd v. oyd (22 Te .
Cv. Rep., 200). It s, however, provded by statute that the dvorce court sha
order a dvson of the estate of the partes n such a way as the court sha
deem |ust and rght, havng due regard to the rghts of each party and ther ch-
dren, If any. (13 ernon s Cv Stats., artce 638.) That power e tends
not ony to communty property but to the separate property of the husband.
( parte Scott, 133 Te ., 1; Cark v. Cark, 35 S. . (2d), 189; erg v. erg,
115 S. W. (2d), 1171; enton v. Cark, 67 S. W. (2d), 37.) t tmes the dvorce
court has made such a dvson of the estate as apparenty to mpose on the
husband a persona obgaton to make stated payments to hs wfe. (Wey v.
Wey, 33 Te ., 358.) Furthermore, a dvorce decree whch does not sette the
rghts of the partes to communty property may not precude a subsequent sut
by the wfe to estabsh her rghts n t. (See Gray v. Thomas, 83 Te ., 2 6.)
nd the decree may be corrected to conform to the ntenton of the partes.
( eer v. eer, 135 Te ., 260.) The power of the court to modfy a property
settement prevousy approved, so as to gve the wfe an nterest n property not
covered by the earer decree, has been dened n absence of fraud or mstake.
(Cannon v. Cannon, 3 S. W. (2d), 13 .) Pettoner chaenges the reabty
of the atter case because on appea the case was dsmssed for want of |urs-
dcton (121 Te ., 63 ), whch meant ether dsagreement wth the reasonng
but approva of the resut, or ack of |ursdcton. (3 ernon s Cv Stats., artce
1728.) nd see Repubc Ins. Co. v. Schoo DM. (133 Te ., 5 5).
We need not, however, endeavor to resove that doubt. Nor need we specuate
as to the power of the court at some future tme to order a dvson of property
n ths case and as an Incdent thereto to mpose on pettoner s husband a per-
sona obgaton as was apparenty done by the dvorce decree n Wey v. Wey,
supra. (See 6 Te . L. Rev., 3 , dscussng em v. em, 291 S. W. 6 8.) For
even though pettoner estabshed that the dvorce court retaned that broad
power, not specfcay reserved, and even though we assume that the power to
make a dvson of property s the equvaent of a power to provde permanent
amony, she has not mantaned her burden of rebuttng the presumptvey cor-
rect determnaton of the Commssoner that the ncome from ths annuty con-
tract was ta abe to her. In order to mantan that burden she woud have to
show that It was at east doubtfu and uncertan whether the Te as court, as an
Incdent of Its power to requre the husband to support hs wfe, retaned contro
over ths annuty contract or the ncome from t. That at east Is the resut
uness we are to broaden the base on whch the Ftch, Fuer, and Leonard cases
rest.
Those cases Invoved so-caed amony trusts. In each the trust was rrevocabe.
In each the husband had an obgaton to support hs wfe.
In the Ftch case the trust provded that the wfe was to receve durng her fe
S600 a month from the ncome of the trust property; the husband, the baance.
We hed that the husband had not shown by cear and convncng proof that
n 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. For a that we know t mght retan the power to reaocate
the Income from that property even though t acked the power to add to or
subtract from the corpus or to tap other sources of ncome. If t dd have such
power, then It coud be sad that a decree approvng an amony trust of the knd
here nvoved merey paced upon the pree stng duty of the husband a partcu-
ar and specfed sancton. (309 U. S., at 156.) nd n speakng of the amony
trust nvoved n Dougas v. Wcuts, supra, we stated (151-152) :
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 In the 15,000 annua sum 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 bene-
ft. Lkewse consstent wth the 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 the ta payer.
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167
5 22(a), rt. 22(a)-.
In the Leonard case ncome from the trust was to be pad to the wfe for her
fe whch together wth ncome from other property was estmated at 30,000 a
year. separaton agreement provded that the husband woud pay hs wfe an
addtona 35,000 each year durng her fe so that her aggregate net ncome for
the mantenance of hersef and her chdren woud be 65,000 a year. The sepa-
raton agreement aso provded that n the event the husband s abty to make
the annua payment of 35,000 became mpared he mght appy to a court for a
reducton of hs obgaton of not ess than 10,000 a year. We hed that the hus-
band had not sustaned hs burden of showng that oca aw and the amony
trust gave hm a fu dscharge from hs obgaton to support hs wfe. (310
U. S., 86.) The trust and the undertakng n the separaton agreement were n-
tegra parts of an arrangement by whch the mantenance and support of the
wfe were secured. (Page 85.) We noted that t was not cear under New York
aw whether or not such a settement coud be remade by the court, though there
was some authorty whch ndcated that the dvorce court s reserved power mght
be e ercsed where the provson n the separate agreement, approved by the
decree, s for support and mantenance. (Pages 86-87.) In vew of that fact
and the nature of the settement, we concuded that the husband had not shown
that the trust was not mere securty for hs contnung obgaton to support hs
wfe.
In the Fuer case t was cear under Nevada aw that the court retaned no
contro over the dvorce decree whch approved the trust settement. Snce there
was no such reserved power and snce the trust contaned no contractua under-
takng by the husband for support of the wfe, we concuded that hs obgaton to
support had been pro tanto dscharged. We hed, however, that the husband was
ta abe on a 0 weeky payment whch he had agreed to make to hs wfe. ut
that fact dd not make hm ta abe on ncome from the trust aso, snce the pro-
vson for weeky payments and the trust were not so Interreated or nterde-
pendent as to make the trust a securty for the weeky payments. (Page 73.) We
aso noted (page 76) that though the dvorce decree e tngushes the husband s
pree stng duty to support the wfe, and though no provson of the trust agree-
ment paces such obgaton on hm, that agreement may nevertheess eave hm
wth suffcent nterest In or contro over the trust as to make hm the owner of
the corpus for purposes of the Federa ncome ta under the rue of everng v.
Cfford (309 U. S., 331 Ct. D. 1 , C. . 19 0-1, 105 ).
Thus a property settement made for the purpose of mantanng or supportng
the wfe may be treated for ncome ta purposes as mere securty for the husband s
contnung obgaton dependent on such consderatons as whether t contans,
or s nterreated wth, contractua obgatons of the husband for her support;
whether the court has a reserved power to ater or modfy t; or whether the
husband retans any substanta nterest In the property conveyed. Where the
settement carres some of the earmarks of a securty devce, then the power of
the court to add to the husband s persona obgatons may be especay sgnfcant.
(See everng v. Leonard, supra.) ut where, as here, the settement appears
to be absoute and outrght and on ts face vests In the wfe the ndca of com-
pete ownershp, t w be treated as that whch It purports to be n absence of
evdence that t was ony a securty devce for the husband s contnung obgaton
to support. There may be dffcuty n pacng a partcuar case on one sde of
the ne rather than the other. ut as stated by Mr. ustce omes In Irwn v.
Gavt (268 U. S., 161,168 T. D. 3710, C. . I -1, 123 (1925) ), That Is the ques-
ton In pretty muen everythng worth argung In the aw. ( nd see arrson v.
8chaffner, 312 D. S., 579, 583.)
s we have sad, pettoner has made no showng whatsoever that the Te as
court retaned the power to reaocate the ncome from ths annuty contract or
to contro It n any way as an ncdent of ts power to requre the husband to
support the wfe. She has not shown that the dvorce court mposed any persona
obgaton on the husband In respect to the settement In queston. nd she Is
not aded by those cases whch enforce agreements of the husband to make perodc
payments to the wfe. (See ohnson v. ohnson, 1 S. W. (2d), 805.) There Is
no such agreement here. Proof that the Te as court mght add to the husband s
persona obgatons as an Incdent to a future property settement s no substtute
for proof that the court had the power to remake ths property settement after
It was consummated. ence there s no ground for concudng that ths sette-
ment whch Is absoute on ts face s mere securty for an obgaton of a husband
to support hs wfe.
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22(a), rt. 22(a)- .
168
The correct ground for refusng to ta such ncome to the husband Is merey
that It s the ump sum whch dscharges hm and not the future ncome receved
by the wfe. (Pau, Fve Years wth Dougas v. Wcuts, 53 arv. L. ev., 1,
17, note .) We noted n everng v. Fuer, supra, page 7 , that outrght trans-
fers of property to the wfe, though provdng for her mantenance and support,
were no dfferent from cases where any debtor, vountary or under the com-
puson of a court decree, transfers securtes, a farm, an offce budng, or the
ke, to hs credtor In whoe or parta payment of hs debt. We do not thnk
that t woud be proper to e tend the rue of Dougas v. Wcuts, supra, to such a
stuaton. The possbty that the dvorce court mght add to the husband s per-
sona obgaton does not ater the resut. s n the Fuer case, the transfer of
property to the wfe mght resut ony n a parta dscharge of the husband s ob-
gaton. If the husband undertook, or was drected, to make other payments, he
mght be ta abe on them. ut the fact that he Is ta abe on a part of the pay-
ments receved by the wfe does not necessary make hm ta abe on a. ( e-
verng v. Fuer, supra, 73.) ence the statement n everng v. Ftch, supra,
page 156, that t must be cear that oca aw and the amony trust have gven
the dvorced husband a fu dscharge and eave no contnung obgaton however
contngent s to be read In ght of the fact that the amony trust n that case
was deemed to be a mere securty devce for the husband s contnung obgaton
to support. For the husband was reeved from payment of the ta on ncome
from the property settement n the Fuer case though he hud a contnung
obgaton to pay the wfe 0 a week.
If the rue of Dougas v. Wkuts. supra, Is not to be e tended to ths type of
case, then on the showng whch has been made the husband woud have sus-
taned hs burden n case the Commssoner had proceeded aganst hm. (Cf.
Mtche v. Commssoner, 38 . T. ., 1336.) Ceary then, the wfe may not
escape.
Such cases as everng v. orst (311 U. S., 112), everng v. ubank (311
U. S., 122), and arrson v. Schaffner, supra, are not opposed to ths resut.
Those cases deat wth stuatons where the ta payer had made assgnments of
ncome from property. e was hed ta abe on the ncome assgned by reason of
the prncpe that the power to dspose of Income s the equvaent of ownershp
of It and that the e ercse of the power to procure ts payment to another, whether
to pay a debt or to make a gft, s wthn the reach of the Federa ncome ta
aw. ( arrson v. Schaffner, supra, 580). ut n those cases the donor or
grantor had parted wth no substanta nterest n property other than the
specfed payments of ncome. (Id., 583.) ere he has parted wth the corpus.
nd the ta s upon ncome as to whch, n the genera appcaton of the Revenue
cts, the ta abty attaches to ownershp. ( ar v. Commssoner, 300 U. S.,
5, 12 Ct. D. 1205, C. . 11)37-1, 175 .) Fnay, there s no barrer under tne
ncome ta aws to ta ng the hoder of an annuty on the ncome receved, how-
ever hs nterest In the fund whch produces the ncome may be descrbed. (Cf.
Irwn v. Gavt, supra.)
ffrmed.
Dssentng opnon by Mr. ustce Frankfubteb, n whch the Chef ustce
|ons.
rtce 22(a)-: What ncuded n gross ncome. 19 2-16-11061
( so Secton 161, rtce 161-1; Secton 162, G. C. M. 2316
rtce 162-1.)
R NU CT OF 1936.
Where, under the terms of a trust nstrument, , the ta payer-
benefcary, may demand the entre net ncome of the trust created
by hs father, the ncome of the trust s ncudbe In the gross
ncome of even though he does not demand the ncome and t s
accumuated prmary for hs beneft pursuant to the terms of the
trust Instrument. Ths resut s not atered by the fact that the
trustees are gven dscreton (when approved by a ma|orty of the
actng trustees) to pay to the grantor s wfe such part of the ncome
of the undstrbuted prncpa for each year as she sha request, by
wrtten notce to the trustee on or before February 1 In each year,
be pad to her.
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169
22(a), rt. 22(a)-.
n opnon s requested whether the ncome of a trust created for
the beneft of s ta abe for Federa ncome ta purposes to the
trust or to the benefcary, the ta abe year nvoved beng 1936.
The ta payer, , s benefcary of a trust created by , hs father.
The trust nstrument provdes that from and after the tme when
the ta payer reaches the age of 30 years (whch he dd pror to the
ta abe year nvoved) the trustees sha pay to hm, f he demands
t, the entre net ncome of the trust estate, accumuatng and addng
to the prncpa any part of the ncome not so demanded. The trustees
are authorzed n ther dscreton to pay such part of the prncpa
to the ta payer as he may request, but, n any event, they are drected
to pay one-thrd n vaue of the prncpa to hm f he shoud demand
t upon hs attanment of the age of 35 years, and to pay a the re-
mander of the prncpa to hm f he shoud demand t upon hs
attanment of the age of 0 years. Upon the death of the ta payer
before he sha have receved the whoe of the prncpa, the trustees
are to dstrbute the trust estate n accordance wth the ta payer s
ast w and testament, or, n defaut thereof, to hs hers at aw.
The trustees are aso authorzed n ther dscreton (but ony when
approved by a ma|orty of the actng trustees) to pay to C, the grantor s
wfe, such part of the ncome of the undstrbuted prncpa for each
year as she sha request, by wrtten notce devered to the trustees
on or before February 1 n that year, be pad to her.
The ta payer aeges that the ncome for the year 1936 s ta abe
to the trust snce he dd not demand t and t was accumuated pur-
suant to the terms of the trust nstrument. e rees on the anguage
of sectons 161 and 162 of the Revenue ct of 1936, reatng to mpo-
ston of ta and to net ncome, respectvey, n the case of estates
and trusts.
Secton 22(a) of the Revenue ct of 1936 reads n part as foows:
(a) Genera Defnton.- Gross ncome ncudes gans, profts, and ncome
derved from saares, wages, or compensaton for persona servce, of whatever
knd and In whatever form pad, or from professons, vocatons, trades, busnesses,
commerce, or saes, or deangs n property, whether rea or persona, growng
out of the ownershp or use of or nterest n 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 what-
ever.
Income from property hed n trust may, n speca crcumstances,
be ta ed under secton 22(a), supra, to a ta payer other than the one
to whom the ncome woud be ta ed under a tera appcaton of the
trust sectons of the statute. (See Dougas v. Wcuts, 296 U. S., 1,
Ct. D. 10 1, C. . I -2,250 (1935); everng v. Cfford, 309 U. S.,
331, Ct. D. 1 , C. . 19 0-1, 105.) The e tent to whch the ta payer
contros the trust corpus, or commands the trust ncome, and the
e tent to whch he may, drecty or ndrecty, beneft from such
ncome are among the prncpa crcumstances to be consdered n
determnng whether the ncome s to be ta ed under secton 22(a)
nstead of beng ta ed to another person under the tera anguage
of sectons 161 and 162. Secton 22(a) may be appcabe to a case
n whch the ta payer coud have receved the trust ncome and used
t for hs beneft, even though he actuay eected to aow the ncome
to accumuate n trust for others. (See Whteey v. Commssoner,
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22(a), rt. 22(a)- .
170
120 Fed. (2d), 782, certorar dened, 62 S. Ct., 110, wheren trust
ncome was hed ta abe to the grantor under secton 22(a) because
he coud have eected to use such ncome n dscharge of hs obgaton
to support and educate hs mnor chdren nstead of aowng t
to accumuate for them.) It s not necessary n the nstant case to
go that far, nasmuch as the accumuaton of ncome n ths nstance
s prmary for the beneft of the ta payer hmsef nstead of for the
beneft of others.
If an ndvdua has the requste contro or command over the
ncome from property hed n trust, such ncome may be ta ed under
secton 22(a), supra, to one who s nether the grantor nor the person
to whom the ncome woud be ta ed under a tera appcaton of
sectons 161 and 162. (See Rchardson v. Commssoner, 121 Fed.
(2d), 1, wheren the trust nstruments accorded to grantor s husband,
ndvduay, the power, nter aa, to cance and termnate the trust
agreements and thereupon to take over the corpus of each trust as
hs own property, the court hodng that the trust ncome was ta abe
to the husband (trustee) under secton 22(a).)
It remans, then, to appy the foregong prncpes to the nstant
case. The ta payer coud have eected to receve a doars n trust
ncome but dd not do so, permttng t to accumuate prmary for
hs own beneft. It s beeved that n these crcumstances the trust
ncome shoud be ncuded n the return of the ta payer-benefcary
under the provsons of secton 22(a), supra. Nor does t appear that
such concuson s necessary atered by the fact that the ta payer s
mother (grantor s wfe) mght have receved such ncome had she
requested t before February 1,1936, and had a ma|orty of the trustees
favoraby entertaned such request. Dstrbuton to her dd not occur,
and the trust ncome, therefore, became avaabe to the ta payer.
The dfference between the power vested n the mother and that vested
n the ta payer s that the mother s rghts are condtoned upon favor-
abe acton by the trustees, whereas the ta payer s eectve rghts are
uncondtona as to a ncome not dstrbuted to hs mother.
It s beeved that decsons such as the one n zabeth S. Svrague
v. Commssoner (8 . T. ., 173, acquescence, C. . II-2, 37
(1928)), apparenty supportng the contenton of the ta payer, may
be dsposed of argey upon the bass that the Commssoner dd not
rey on secton 22(a), supra, n those cases. (Cf. ty, ecutor, v.
Unted States, 63 Ct. Cs., 55, T. D. 076, C. . I-2, 233 (1927);
. Lea W. Stokes v. Commssoner, 28 . T. ., 12 5.) It s aso be-
eved that the nstant case s dstngushabe from obes v. Crooks
(33 Fed. (2d), 1016), because n the atter case the ma|orty of the
benefcares had to agree to a demand upon the trustee before the
trust ncome coud be dstrbuted to them.
In vew of the foregong, t s the opnon of ths offce that the
ncome of the trust created by for the beneft of s ncudbe n
the gross ncome of the ta payer-benefcary ( ) for the year 1936.
. P.Wenche,
Chef Cownse, ureau of Interna Revenue.
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171
22(a), rt. 22(a)-16.
rtce 22(a)-16: cquston or dsposton
by a corporaton of ts own capta stock.
19 2-22-11111
Ct. D. 1558
INCOM T R NU CT OF 1936 D CISION OF COURT.
1. Gross Incomk Profts from Sae of Stock cquston ob
Dsposton by Corporaton of Its Own Stock.
corporaton whch, n 1030 and 1031, bought on margn shares
of ts own stock wth the ntenton of retrng them, but Instead
carred them on the books for s years as treasury stock and sod
them In 1037, s sub|ect to ta on the amount of proft reazed from
such sae, under the provsons of secton 22(a) of the Revenue ct
of 1936 and artce 22(a)-16 of Reguatons 0 . The corporaton
reazed a gan ust as f t had purchased the stock of any other
corporaton on margn on a ow market and sod t ater at a profc
on a hgher market.
2. adty of Reguatons.
rtce 22(a)-16 of Reguatons 9 does not attempt to enarge,
repea, or modfy the statute, and Is a vad e ercse of the Treasury
Department s rue-makng power.
3. Certorar Dened.
Petton for certorar dened May 5, 19 2.
Unted States Crcut Court of ppeas fob the Ffth Crcut.
Maron . en, Coector of Interna Revenue, v. Natona Manufacture d
Storet Corporaton.
125 Fed. (2d), 239.
ppea from the Dstrct Court of the Unted States for the Mdde Dstrct of Georga.
McCobd, Crcut udge: avng purs|ed and e hausted ts admnstratve
remedes, Natona Manufacture Stores Corporaton fed sut aganst the
coector to recover an aeged overpayment of Income ta for Its fsca year
endng une 30, 1937. The case was tred wthout a |ury, and the court entered
fndngs of fact and concusons of aw and entered udgment for the ta payer
aowng a refund of 5,155.30.
The matera facts are not dsputed. The appeee s a Deaware corpora-
ton wth Its man offce In tanta, Ga. Pror to the year 1930 Its offcers
determned that t woud be to the best Interest of the corporaton to purchase
and retre shares of ts common stock at such tmes as It was fet that the
stock coud be purchased at a prce advantageous to the corporaton. In
pursuance of ths pocy the corporaton has purchased stock from tme to tme
at a prce ower than book vaue, and has retred t. In 1930 and 1031
Natona purchased 6,900 shares of ts stock on the open market for 3,8 2.50.
It was the ntenton of the company to retre ths bock of stock. The stock
was purchased through ayden-Stone Co., a brokerage house. The corpora-
ton was unabe to pay the fu purchase prce of the stock, and ayden-Stone
Co. agreed to accept a 50 per cent payment and keep possesson of the stock
and carry the baance of the ndebtedness. The presdent of appeee, Mr.
Fo , who had charge of the purchase and sae of the 6,900 shares of stock,
testfed that the stock was bought on 50 per cent margn.
Wth the comng on of the depresson, Natona was unabe to pay the ba-
ance due ayden-Stone Co. The stock was not canceed and retred rs had
been Intended, but was hed by ayden-Stone Co. and carred on the ta payer s
books as treasury stock at a nomna vaue of 1 per share. In 1937 the
ta payer s need for cash workng capta had Increased, and n the same year
ayden-Stone Co. made demand for payment. The company thereupon deter-
mned to se the 6,900 shares of common stock. On March 15. 1937, the bock
of stock was sod to a syndcate of tanta brokers for 10 per share, a prce
anuary 28, 19 2.
OPINION.
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22(a), rt. 22(a)-16.
172
beow the far vaue of the shares and beow the market prce. Prom ths sae,
after deducton of ta and e penses, Natona reazed 68,718.15, beng an
e cess of 2 ,875.65 over the purchase prce of the shares n 1930 and 1031.
Ths e cess amount was reported as proft n the corporaton s ncome ta
return for the fsca year endng une 30, 1937, and ncome ta was pad
accordngy. The ta payer contends here as t dd before the coector and n
the court beow that ths amount was erroneousy ncuded n ncome.
The sae of the stock havng occurred durng the fsca year endng une 30,
1937, the Revenue ct of 1936 governs the dsposton of ths case. Secton
22(a) of the Revenue ct of 1936 provdes that gross ncome ncudes gans,
profts, and Income derved from saes or deangs n property,
whether rea or persona, growng out of the ownershp or use of or nterest
n such property; . Treasury Reguatons 9 , promugated under the
Revenue ct of 1936, provdes:
rt. 22(a)-16. cquston or dsposton by a corporaton of ts own capta
stock.

ut f a corporaton deas n ts own shares as t mght n the shares of
another corporaton, the resutng gan or oss s to be computed n the
same manner as though the corporaton were deang n the shares of
another.
Ths provson was aso contaned n artce 22(a)-16 of Treasury Reguatons
86, promugated under the Revenue ct of 193 .
From 1920 to 193 the Treasury reguatons under the successve Revenue
cts provded that where a corporaton purchased any of Its stock and hed It
as treasury stock the sae of such stock w be consdered a capta transac-
ton. corporaton reazes no gan or oss from the purchase or
sae of Its own stock. See Reguatons 5; artces 5 2 and 563; Reguatons
62, artces 5 3 and 563; Reguatons 65, artce 5 3 (192 ); Reguatons 69,
artce 5 3 (1926) ; Reguatons 7 , artce 66 (1928) ; Reguatons 77, artce 66
(1932). The reguatons were amended on May 2, 193 , by Treasury Decson
30 (C. . III-1, 36), so as to emnate the provson that a corporaton
reazes no gan or oss from the purchase or sae of ts own stock, and
ncuded n ts stead anguage substantay the same as that In the above quoted
provson of Reguatons 9 , artce 22(a)-16 (1936), and Reguatons 86.
artce 22(a)-16 (193 ).
In support of the concusons and |udgment of the court beow, the appeee
contends that the orgna Treasury reguatons had acqured the force and effect
of aw by vrtue of the fact that Congress had repeatedy reenacted the
Revenue ct wthout change n the defnton of gross ncome contaned In
secton 22(a), and that the Treasury Department was wthout authorty to
amend or otherwse change the reguatons. (Cf. . R. Squbb Sons v.
evcrng, 98 Fed. (2d), 69.) The coector, on the other hand, ponts to the
fact that there has been no substanta change n the reguatons snce 193 ,
and contends that the admnstratve practce dscosed by the reguatons has
been suffcenty ong contnued and unform to |ustfy an assumpton that
Congress has adopted ther nterpretaton by reenactng the anguage construed
by them.
In everng v. Remods Co. (306 U. S., 110 Ct. D. 1383, C. . 1939-1, 225 ),
the Supreme Court had under consderaton the amendment and change n the
Treasury reguatons adopted under the Revenue cts through 1932. The Court
hed that the amended reguatons coud not, under the facts there shown, be
retroactvey apped to cover a transacton consummated n the ta abe year
1929. The Court dd not pass upon the vadty of the reguaton If prospectvey
apped. Wthout decdng the pont, the Court sad, It may be that by the
passage of the Revenue ct of 1936 the Treasury was authorzed thereafter to
appy the reguaton n ts amended form.
In the atter case of everng v. Wshre O Co. (308 U. S., 90 Ct. D. 1 2 ,
C. . 1939-2, 213 ), the Supreme Court hed that a reguaton nterpretng one
ct does not become frozen nto another ct merey by reenactment of that
provson, so that admnstratve nterpretaton can not be changed prospectvey
through e ercse of approprate rue-makng powers. ( so see everng v.
Reynods, 313 U. S., 28.)
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173
23(c), rt. 23(c)-.
The case at bar does not present a queston of retroactve appcaton of
reguatons such as was condemned n Ievcrng v. Reynods Co., supra, or
Commssoner v. Pan- mercan L. Ins. Co. (I Fed. (2d), 306). rtce 22(a)-16
of Reguatons 9 was n fu force and effect when Natona sod Its 6.900
shares of stock n 1937. The reguaton does not attempt to enarge, repea,
or modfy the statute, and Is a vad e ercse of the Treasury Department s rue-
makng power.
The appeee further contends that the sae of the stock was purey a capta
transacton whch dd not gve rse to ncome, and that the ower court propery
hed that even f the questoned reguaton be hed vad t dd not appy to the
transacton for the reason that pantff dd not dea In ts own shares as
t mght dea n the shares of another corporaton. Ths contenton s wthout
mert. The Natona Manufacture Stores Corporaton purchased the stock
on 50 per cent margn, carred t on the books for s years as treasury stock,
and then sod t aod reazed 2 ,875.65 n e cess of ts purchase prce. Ths
e cess amount was made avaabe to the corporaton, and was used by t
to ncrease ts workng capta. The ta payer reazed a gan ust as f t had
purchased the stock of any other corporaton on margn on a ow market and
sod t ater at a proft on a hgher market. We thnk t cear that Natona
reazed a ta abe accesson to ncome n the amount of 2 ,875.65, f we take
words n ther pan popuar meanng as they shoud be taken here. (Unted
States v. rbu Lumber Co., 28 U. S., 1 Ct. D. 20, C. . -2, 356 (1931) ;
cf. ammond Iron Co. v. Commssoner, 122 Fed. (2d), .)
ppeee s not entted to a refund of the ta pad. The |udgment s reversed.
Fosteb, Crcut udge, dssented.
S CTION 23(c). D DUCTIONS FROM GROSS INCOM :
T S G N R LLY.
btoe 23(c)-: Ta es. 19 2-23-11119
Ct. D. 1559
INCOM T R NU CT OF 1936 D CISION OF SUPR M COURT.
L Gross Income Deductons Ta es Pad Wthn Ta abe
Year greement by Purchase to Pay State and Cty
Ta es mounts so Pad Consttute Part of Cost.
Durng 1936 and 1937 the ta payers purchased varous parces
of rea estate In Maryand upon whch State and cty ta es for the
current year had not been pad at the tme of purchase, and, pur-
suant to contract, pad the amount of such ta es; the vendors
undertook to bear the burden of that porton of the ta es arth-
metcay aocabe to the fracton of the year that had e pred pror
to the date of purchase, and ad|ustments were made n the purchase
prce to refect ths arrangement. ed: The amounts so pad by
the purchasers dd not consttute ta es pad wthn the meanng
of secton 23(c) of the Revenue ct of 1936 but were part of the
cost of the propertes, and hence were not deductbe from gross
ncome. Under the oca aw such ta es consttuted a en on the
rea estate and a persona abty of the vendors pror to the sae,
and the purchasers can not deduct the amounts, or any porton
thereof, pad to dscbarge abtes f ed aganst ther predecessors
n tte by the aws of Maryand. Partes can not change the nc-
dence of oca ta es by ther agreement.
2. Decson Reversed.
Decson of the Unted States Crcut Court of ppeas, Fourth
Crcut (19 1) (123 Fed. (2d), 399), afSrmng decson of the Ds-
trct Court of the Unted States for the Dstrct of Maryand (19 1)
(36 Fed. Supp., 722), reversed,
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23(c), rt. 23(c)- .
17
Supreme Court of the Unted States.
M. ampton Magruder, Coector of Interna Revenue for the Dstrct of Mary-
and, pettoner, v. Frederck M. Suppee and zabeth Ot. Suppee, hs Wfe.
On wrt of certorar to the Unted States Crcut Court of ppeas for the Fourth Crcut.
May 25, 19 2.
OPINION.
Mr. ustce Murphy devered the opnon of the Court.
Durng the years 1936 and 1937 respondents purchased varous parces of
rea estate n atmore, Md. In each Instance the State and cty ta es on the
rea estate for the current year had not been pad at the tme of purchase. The
varous contracts provded for the apportonment of these current rea estate
ta es, respondents agreeng to pay the amount of the ta es, and the vendors
undertakng to bear the burden of that porton of the ta es arthmetcay
aocabe to the fracton of the year that had e pred pror to the date of purchase.
d|ustments were accordngy made n the purchase prces to refect ths
arrangement.
Respondents pad the oca authortes the fu amounts necessary to ds-
charge the ta abty. In ther 1936 and 1937 ncome ta returns, whch were
on the cash bass, they deducted that porton of those ta es aocabe to the
perods after purchase. The Commssoner of Interna Revenue rued that the
amounts n queston were not deductbe under secton 23(c) of the Revenue ct
of 1936 ( 9 Stat, 16 8, 1659), but nstead were merey part of the cost of the
propertes. ccordngy, he made a defcency assessment whch was pad under
protest. Ths sut for refund foowed. The dstrct court hed the amounts
were deductbe, and the crcut court of appeas affrmed on the authorty of ts
prevous decson n Commssoner v. Rust s state (116 Fed. (2d), 636 Ct. D.
1508, C. . 19 1-1, 302 ). We granted certorar because of an asserted confct
wth fson v. Commssoner (98 Fed. (2d), 508 Ct. D 1 09, C. . 1939-2, 19S ).
The queston for decson s whether the amounts apportoned by respondents
on the bass of the fractons of the ta abe years remanng after the severa
purchases consttute ta es pad wthn the ta abe year wthn the meanug
of secton 23(c) of the Revenue ct of 1936 ( 9 Stat, 16 8, 1639), and hence
are deductbe.
The gudng prncpe for determnng whether a payment satsfyng a ta a-
bty s a ta pad wthn the meanng of secton 23(c) s furnshed by the
appcabe Treasury reguaton, whch states that In genera ta es are deductbe
ony by the person upon whom they are Imposed. (See Coston v. urnet,
59 Fed. (2d), 867; Sma v. Commssoner, 27 . T. ., 1219; Pau, Seected Studes
n Federa Ta aton, Second Seres, 2 .) Resort must be had here to the aws
of Maryand and of the cty of atmore to determne upon whom the State and
cty rea estate ta es were mposed. (Wash-McOure Co. v. Commssoner,
97 Fed. (2d), 983, 98 ; cf. everng v. Fuer, 310 U. S., 69, 7 -75; and see Pau,
op. e t. supra, 23-2 .)
To ustrate concretey the workngs of the Maryand ta system wth respect
to respondents purchases the property bought on May 10, 1936, may be taken
as typca of a the other transactons. The assessment date, or date of
fnaty, for both State and cty ta es was October 1, 1935. These ta es were
1 Ssc. 23. Deductons from Gross Incomb.
In computng net Income there sha be aowed as deductons:

(c) Ta es Gnbray. Ta es pad or accrued wthn the ta abe year, .
36 Fed. Supp., 722.
123 Fed. (2d), 399.
rtce 23(c)- of Treasury Reguatons 9 , promugated under the Revenue ct of
1936. Ths s a reguaton of ong standng. See Treasury Reguatons SR. promugated
under the Revenue ct of 193 , artce 23(c)- : Treasury Reguatons 77, promented
under the Revenue ct of 1932, artce 151 : Treasurv Reguatons 7 , promugated under
the Revenue ct of 1928, artce 151 : Treasury Reguatons 69 promugted under
the Revenue ct of 1926. artce 181; Treasury Reguatons 65, promugated under the
Revenue ct of 192 , artce 131.
nn. Code of Maryand (Fack, 1939), voume 2, artce 81, secton 26(b), provdes
that State and oca ta es sha have the same date of fnaty as s provded by oca aw,
and the date of fnaty for atmore wth respect to anv ta year s October 1 of the
precedng year. See Code, Pubc Loca Laws of Maryand (Fack, 1930), artce ,
secton 0.
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175
23(c), rt. 23(c)-.
for the caendar year 1936 and became due and payabe on anuary 1, 1936,
athough the defaut date for cty ta es was not unt uy 1, 1936, and for State
ta es anuary 1,1937. oth the State and the cty had ens aganst the property
from the due date, anuary 1,1936. nd, respondents vendor became personay
abe for these ta es before the sae. n acton of assumpst coud have been
brought aganst hm for the ta es at any tme after the due date. ad he sod
the property between October 1, 1935, and anuary 1, 1936, he apparenty woud
st have remaned personay abe, and If he had gone nto bankruptcy after
such sae the ta ng authortes woud have had a provabe cam aganst hm.
(In re Wes, Fed. Supp., 329; cf. atmore v. Perrn, 178 Md., 101, 107.)
It s thus apparent that ta ens had attached aganst the propertes and that
respondents predecessors n tte had become personay abe for the ta es
pror to any of the purchases. The attachment of a en for ta es aganst prop-
erty before Its sae has been hed to prohbt the vendee from deductng as
ta es pad, amounts pad by hm to dscharge ths abty. (Lfson v. Com-
mssoner, 98 Fed. (2d), 508; Wash-McOure Co. v. Commssoner, 97 Fed. (2d),
983: Merchants ank udng Co. v. everng, 8 Fed. (2d), 78 Ct. D. 1189,
C. . 1937-1, 189 ; everng v. Mssour State Lfe Insurance Co., 78 Fed. (2d),
781.) ta en s an encumbrance upon the and, and payment subsequent to
purchase, to dscharge a pree stng en Is no more the payment of a ta n any
proper sense of the word than s a payment to dscharge any other encumbrance,
for nstance a mortgage. It s true that respondents here coud not have re-
taned the propertes uness the ta es were pad, but t s aso true that they
coud not retan them wthout payng the purchase prce. It s no answer
therefore to say that the property was burdened wth the ta es and that re-
spondents became obgated to pay them. There was a burden, but t was con-
tractuay assumed. In dschargng ths assumed obgaton respondents were
not payng ta es mposed upon them wthn the meanng of secton 23(c). For
ony the person ownng the property at that tme . e., when the ta en at-
taches) s sub|ected to the burden whch the aw mposes; and ony the person
who has been thus sub|ected to the burden of the ta s entted to a deducton
for payng t. Payment by a subsequent purchaser s not the dscharge of a
burden whch the aw has paced upon hm, but s actuay as we as theoret-
cay a payment of purchase prce; for, after the en attaches and the ta ng
authorty becomes pro tanto an owner of an nterest n the property, payment
of the ta by a purchaser s nothng but a part of the payment for unencumbered
tte. ( udge Parker, dssentng n Commssoner v. Rust s state, 116 Fed.
(2d), 636, 6 1.)
Furthermore, respondents pad ta es for whch ther vendors were personay
abe. Ths was ceary the payment of a ta mposed upon another and there-
fore not deductbe by respondents. (Cf. Wash-McOure Co. v. Commssoner,
97 Fed. (2d), 983; Oatens Investment Co. v. Commssoner, 36 . T. ., 309;
ohsaat v. Commssoner, 0 . T. ., 528. nd see Commssoner v. Co card,
110 Fed. (2d), 725, 727 Ct. D. 1 58, C. . 19 0-1, 123 .)
Thus ether a pree stng ta en or persona abty for the ta es on the
part of a vendor s suffcent to forecose a subsequent purchaser, who pays the
amount necessary to dscharge the ta abty, from deductng such payment
as a ta pad. Where both en and persona abty concde, as here, there
can be no other concuson than that the ta es were mposed on the vendors.
Respondents smpy pad ther vendors ta es; they can not deduct the amounts,
or any porton thereof, pad to dscharge abtes so frmy f ed aganst ther
predecessors In tte by the aws of Maryand.
The vew of the court beow that the partes contractua arrangement for
apportonment of the ta burden was controng Is untenabe. Partes can not
Ta es are mposed annuay on a caendar year basts. See nn. Code of Maryand
(Fack, 1939), voume 2, artce 81, secton 26 (a) and (b) ; Code, Pubc Loca Laws of
Maryand (Fack, 1930), artce , secton -10.
See nn. Code of Maryand (Fack, 1939), voume 2, artce 81, secton 6(b), whch
provdes that State ta es are payabe on anuary 1. Secton 6(a) provdes that oca
ta es sha be payabe n accordance wth oca aw, and under oca aw atmore ta es
are due on anuary 1. (Code, Pubc Loca Laws of Maryand (Fack, 1930), artce ,
secton 0 )
Code, Pubc Loca Laws of Maryand (Fack, 1930), No. , secton 0; nn. Code of
Maryand (Fack, 1939), voume 2. artce 81, secton 7 .
nn. Code of Maryand (Fack, 1939), voume 2, artce 81. secton 72.
10 nn. Code of Maryand (Fack, 1939, voume 2, artce 81, secton 15 . (See County
Commtmonere of Frederck County v. Cagett, 31 Md., 210 ; aenctt v. M. t C. C. of Ocean
Cty. 118 Md.. 11 , 119; Free v. Oreene, 175 Md., 36, 1.)
u The opnon beow was a per curam affrmance on the authorty of Commanoner v.
Runt s state (116 Fed. (2d), 636). The court there reed on the fact that the partes
had agreed to apporton the ta obgaton. (Page 6 0.)
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23(m), rt. 23(m)-10.
176
change the ncdence of oca ta es by ther agreement. nd It s mseadng to
speak of rea estate ta es as appcabe to the fractona part of a ta perod
foowng purchase. Such ta es are smpy one form of rasng revenue for the
support of government. They are not ke rent, nor are they pad for the prv-
ege of occupyng property for any gven perod of tme.
The |udgment beow Is reversed.
rtce 23(c)-1: Ta es.
R NU CT OF 1936.
Gasone and motor fue ta es mposed by the State of Lousana.
G. C. M. 8936 (C. . -, 110 (1931)) and G. C. M. 1 970 (C. .
I -2, 69 (1935)) revoked. (See G. C. M. 22998, page 50.)
rtce 23(c)-1 : Ta es.
R NU CT OF 1936.
Certan Lousana gasone and motor fue ta es. Retroactve
appcaton of G. C. M. 22998 page 50, ths uetn . (See I. T. 3526,
page 52.)
S CTION 23 (k). D DUCTIONS FROM GROSS
INCOM : D D TS.
rtce 23(k)-: ad debts.
R NU CT OF 1936.
cceptance by credtor of vountary conveyance of property, n-
cudng property pedged as securty for the debt, n parta or n
fu satsfacton of the unpad porton of the ndebtedness; I. T. 3121
(C. . 1937-2, 138) modfed and I. T. 3167 (C. . 1938-1, 190) re-
voked. (See I. T. 35 8, page 7 .)
S CTION 23 (m). D DUCTIONS FROM GROSS
INCOM : D PL TION.
rtce 23(m)-10: Depeton d|ustments of 19 2-18-11077
accounts based on bonus or advanced royaty. Ct. D. 1553
INCOM T R NU CTS OF 1026 ND 1936 D CISION OF COURT.
1. Deducton Depeton owance O and Gas Leases Sur-
render of Unproductve Leases mount of Depeton -
owance Restored to Income Upon Surrender.
Where a andowner made o and gas eases n 1926 for terms
of 10 years and so ong as o or gas mght be produced, for whch
he receved cash bonuses, and deducted the 27 per cent depeton
aowed by secton 20 (c)2 of the Revenue ct of 1926 n returnng
ncome for that year, upon the surrender of certan of the eases
n 1936 wthout any o or gas havng been produced therefrom
the Commssoner dd not err n restorng to Income for the year
1936 the amounts of the depeton aowances taken n 1926.
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177
23(m), rt. 23(m)-10.
2. Deducton Depeton owance On. and Gas Leabes
Ranch Property Leased n Separate Parces ach Lease
Consttutes The Property for Income and Depeton
Purposes.
Where the owner of property whch had been operated as a
Snge ranch eased t n 1926 for o and gas operatons n sepa-
rate parces to varous essees, each ease rather than the ranch
as a whoe s to be treated as the property the ncome from
whch was sub|ect to percentage aowances for depeton under
secton 20 (c)2 of the Revenue ct of 1926.
8. Rehearng Dened.
Petton for rehearng dened uy 7, 19 1.
. Certorar Dened.
Petton for certorar dened November 17, 19 1.
Unted States Crcut Court of ppeas for the Ffth Crcut.
. T. Sneed, r. (Terry Thompson et a., Independent ecutors, substtuted
pettoners n the pace and stead of . T. Sneed, r., Deceased), pettoners, v.
Commssoner of Interna Revenue, respondent.
119 Fed. (2d), 767.
Petton for revew of decson of the Unted States oard of Ta ppeas.
efore Sbey, omes, and McCord, Crcut udges.
May 5, 19 1.
OPINION.
Sbey, Crcut udge: The man queston s, Where a andowner has made
o and gas eases for whch he receved bonuses and has taken the 27 /| per cent
depeton aowances as a deducton n returnng ths ncome, and the eases
are n a ater year surrendered wthout any producton, cau the amount of
the depeton aowances be treated as ncome n the ta account for the
ater year nother queston s whether the andowner may treat hs entre
ranch, on parts of whch these and other eases were made, as one property
n respect of depeton, or must he dea wth each ease as the property.
The ta payer Sneed, ownng a tract of 80.000 acres n the Te as Panhande
whch he operated as a snge ranch, n 1926 after o and gns had been ds-
covered eased t for such operatons n many separate parces to dfferent
essees for terms of 10 years and so ong as o or gas mght be produced.
esdes the usua royates, a cash bonus was receved on each ease. Many
eases were deveoped and producton both of o and gas secured. Twenty-
s of the eases coverng about 5,000 acres were not deveoped, though cover-
ng the same gas and o poo, but were surrendered n 1936. t that date
the gas pressures under the ground had, because of producton, been reduced
an average of 11 per cent, ndcatng that the gas reserve had been corre-
spondngy dmnshed. The ands thus freed were by the ta payer agan
eased n 1936, but smaer bonuses were receved on whch percentage depe-
ton aowances were agan taken. The Commssoner restored to ncome
the depeton aowances deducted from the bonuses n the 1926 ta returns,
aggregatng (as corrected) 33,528, and assessed addtona ta es for the year
1936, reyng upon Reguatons 69, artce 210(d) of the year 1926 and Regua-
tons 9 , artce 23(m)-10(c) for 1936, and hs Genera Counse s Memorandum
1 8 (C. . I -1, page 98), whch construed the reguatons wth respect
to the decson n errng v. Commssoner (293 U. S., 322 Ct. D. 90 . C.
I -1, 303 (1935) ), then recenty rendered. It was by reason of the errng
case that the oard of Ta ppeas n November, 1935, aowed Sneed the
depeton deductons on hs 1926 ncome ta es. Sneed v. Commssoner, 33
. T. ., 78.) The oard of Ta ppeas sustaned the Commssoner s
assessment of ta es for 1936 ( 0 . T. ., 1136), and ths petton for revew
foowed, prosecuted by Sneed s e ecutors.
Snce the 80,000-acre tract, throughout whch the 26 eases n controversy
are scattered, has suffered arge producton and an average 11 per cent
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23(m), rt. 23(m)-10.
178
depeton of gas reserve as a whoe, and snce the oard has hed In Cra b v.
Commssoner ( 1 . T. .. 686) that If there be any producton there can
be no restoraton to ncome of depeton aowances, ta payer contends t
s mportant to decde whether the whoe 80,000 acres he owns n a body s
the property mentoned n Revenue ct of 1926, secton 20 (c)2, In the
case of o and gas wes the aowance for depeton sha be 27 per centum
of the gross ncome from the property durng the ta abe year. The Crabb
case s now before us on revew, but not on the pont for whch ta payer has
cted t. We e press no opnon on that pont, but assumng t we decded,
we hod that the property means generay each separate tract, f operated
by the owner, or each separate ease f eases are made. The aowance for
depeton, as dstngushed from the mode of measurng t, s made (as t has
been n pror and ater cts) n the other sectons defnng deductons, secton
21 (9) for ndvduas and 23 (8) for corporatons, thus: In the case
of mnes, o and gas wes, other natura deposts, and tmber, a reasonabe
aowance for depeton accordng to the pecuar condtons n
each case; such reasonabe aowance n a cases to be made under rues and
reguatons to be prescrbed by the Commssoner wth the approva of the
Secretary. We thnk the power to defne by reguaton e tends to the
provsons n secton 20 (c)2 touchng the aternatve percentage aowance
as a measure of the depeton, as we as the measure by cost or dscovery
vaue. The e presson the property In reference to percentage depeton
admtted of reguatory defnton and Reguatons 69 (1926), artce 221, pro-
vded: In genera the property, as the term s used n secton 20 (c)2
and ths artce, refers to the separate tracts or eases of the ta payer. We
hed the statute and the reguaton, as to the owner of tracts whch he
operated and eases whch he worked, prevented hs aggregatng the prop-
ertes nton Petroeum Co. v. Commssoner, 71 Fed. (2d), 20). The pres-
ent ta payer seeks to dstngush that decson because he worked no property,
but ony eased Irs ranch for others to work. We thnk that by easng t n
separate parces to dfferent persons he separated t nto as many dfferent
propertes as there were eases made. ach ease stands to tsef, and both
essor and essee are equay bound so to treat It. There Is a provson n
ater reguatons that where two or more mnera propertes are Incuded In
a snge tract or parce of and the ta payer s Interest In such mnera prop-
ertes may be consdered to be a snge property, provded such treatment
s consstenty foowed. If t appes here at a there Is no proof of the
consstent treatment by ths ta payer of hs whoe ranch as one mnera prop-
erty; t rather appears that the eases have been separatey deat wth. ach
of the 26 eases here Invoved s a separate property as respects depeton.
Turnng to the man queston, the ta payer frst urges that by the surrender
of the eases In 1936, unworked, no ncome was reazed n that year and none
can be charged to hm. It s not a good repy that Sneed got back the easehod
nterest n the and n 1936. If that be the ground of ncome, the vaue n 1936
of what he got back woud be n queston. nd In truth he got nothng back;
the ease smpy pershed accordng to ts orgna terms. The Commssoner s
poston Is not that he got and back but that the occurrences In 1936 deveoped
a change In status of so much of the money ncome receved n 1926 as then
went unta ed because t stood for an antcpated depeton of hs o reserve,
and beng a return of capta was not Income sub|ect to ta aton. It Is too we
setted to requre further dscusson that when o and gas reserves are eased
for bonus and royaty, the bonus s an advance royaty, and Incudes not ony
gan whch Is Income but aso a return of capta about to be depeted whch s
not Income. The segregaton of ths return of capta s the purpose of a de-
peton aowances. s to royates, the depeton actuay happens as the roy-
aty accrues, so the present queston can hardy occur. s to the bonus, the
depeton has not yet happened, and there was a queston whether a deducton
therefor coud be taken unt t dd happen. Ths court, n errng v. Comms-
soner (70 Fed. (2d), 785), sad not. The Supreme Court (293 U. S., 322) re-
versed, hodng the depeton deducton ought to be taken out of the ncome when
the ncome s receved and not when the antcpated depeton occurs. The
Court foresaw the queston we now have In case the ease e pres wthout any
actua depeton under t, but e pressed no opnon on t. It dd, however, say
there was no dfference In substance between the percentage depeton aowance
In case of gas and o wes and the cost bass depeton aowance whch pror
to 1926 was the ony way of measurng t, and whch may st aternatvey be
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179 23(m), rt. 23(m)-10.
resorted to f t s arger. The court asserted: The nature and purpose of the
aowance s the same n both cases, ctng Unted States v. Dakota-Montana
O Co. (288 U. S., 59, 67 Ct. D. 655, C. . II-1, 2 3 (1033) ), where t was
sad of the percentage aowance: There s no ground for supposng that Con-
gress by provdng a new method for computng the aowance for depeton n-
tended to break wth the past and narrow the functon of that aowance. The
reasonabe nference s that t dd not and that depeton ncudes under the
1926 ct precsey what t ncuded under the earer cts. In fact n a the
cts the aowance s authorzed, as above ponted out, n dentca words n
sectons provdng the deductons from ncome. Its measure s aways set forth
n wdey separated sectons, whether by a percentage whch s assumed to fary
represent the return of capta, or by a cacuaton on the bass of cost and actua
remova of mneras.
The deducton for depeton from a bonus receved never represents an actua
but aways an antcpated depeton. If the antcpated depeton does not occur
and t becomes certan t never w, t then becomes pan that what was thus
deducted s not a return of capta, but gan ke the remander of the bonus
pad. n ad|ustment s due. Shoud t be made by reopenng the ta sette-
ment for the year the bonus was receved and the deducton taken That woud
be most ogca and accurate. ut the mtaton statutes, whch woud prevent
t n ths case, do not provde for t, and admnstratve convenence s aganst
t. The Commssoner from the very begnnng, under the broad reguatory
power attached to every authorzaton of the deducton for depeton, soved the
probem by requrng an addton to ncome n the year when the status as n-
come of the amount deducted becomes cear. The provson was carred forward
n the 1926 Reguatons 69, artce 216(d) : Upon the e praton, termnaton,
or abandonment, wthout the remova of any or a of the mnera contempated
by the ease the essor sha be requred to restore to capta account the e cess
of depeton theretofore aowabe In respect of the bonus and royaty payments
over the actua depeton or oss n vaue sustaned as a resut of the operatons
under the ease, and a correspondng amount must be returned as ncome for
the year n whch the ease e pres, termnates, or s abandoned. In that year
(and snce) there was added (e) In eu of the treatment provded for n the
above paragraphs, the essor of o and gas wes may take as a depeton deduc-
ton 27 per cent, etc. It Is argued that whe the cost or dscovery
vaue bass deducton Is and aways has been sub|ect to (d) above quoted, the
meanng of (e) Is that the percentage deducton s absoute and fna. The
Commssoner s Genera Counse dd not thnk so when he rued upon the matter
n 1935, after the decson n the errng case (C. . I -1, page 98) ; but he
hed that the meanng of the errng case, n connecton wth Murphy O Co. v.
urnet (2S7 U. S., 299 Ct. D. 619, C. . II-1, 231 (1933) ), whch deat wth
a cost-bass depeton aowance and referred wth approva to the reguaton
under dscusson, was that the deducton was the same n nature and purpose
however measured, and the reguaton meant to treat thorn ake when the ease
ended wthout producton. Ths amounts to sayng that (e) s n eu of (a)
(6) (c) and of (d) perhaps so far as t speaks of a capta account, but not so
far as restoraton to ncome s concerned. The percentage depeton aowance
s more favorabe to the ta payer, as ts choce In ths and other cases shows.
It ought not to be made st more favorabe by makng It fna n the case of a
bonus deducton. The whoe reasonng n the errng case s that Congress n-
tended to aow a smpe measure of the deducton to be substtuted for a com-
pcated one, but to eave the nature of the deducton as f ed by the reguatons
otherwse unchanged. We adopt that vew. Sneed took hs deductons n 1926,
under the aw and reguatons then e stng, and e s bound to restore them to
Income n 1930 when t became certan that the supposton of a return of capta
was untrue, and they were reveaed as pure gan.
The chargng as Income n 1936 of gan actuay receved n 1926 nvoves no
consttutona queston. Under the s teenth amendment, that whch Is not n-
come can not be ta ed as such, but there s no requrement as to the year n
whch Income sha be ta ed. Congress coud f decenna perods nstead of
annua ones. It has In genera adopted the annua pan, but has authorzed
ether actua recepts and dsbursements or accrua as the bass of the account-
ng. On the atter bass, there may be a dfference of years n enterng the tems
on the account from what woud have been true on a bass of actua recepts and
dsbursements. ut these two bases are eastc, for n the Revenue ct of 1926,
secton 200(d) whch drects Income and deductons to be accounted for n the
year receved and pad or accrued, there s an e cepton: Uness n order to
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180
ceary refect Income the deductons or credts shoud be taken as of a dfferent
perod. Smar anguage occurs n the other cts. The cear refecton of
ncome that ought to be ta ed s the man ob|ect. (See Guaranty Trust Co. v.
Commssoner, 303 U. S., 93 at page 88 Ct. D. 1327, C. . 1938-1, 2581.) Wth
or wthout the ad of a reguaton, there have been many cases of ths so-caed
restoraton to ncome of a deducton taken n a pror year. On the accrua
bass, f a ta , or e pense, or other deducton s taken one year as accrued, but
t turns out n another year that there was no such abty or a ess one, the
matter s corrected by a charge to ncome as though there had been a recovery
back. (Chareston d W. C. Ry. Co. v. urnet, 50 Fed. (2d), 3 2; Chcago.
R. 1. d P. Ry. Co. v. Commssoner, 7 Fed. (2d), 990; Nash v. Commssoner, 88
Fed. (2d), 77.) So when on a cash bass a debt s deducted as bad and n another
year s coected n whoe or n part, the matter s corrected not by gong back
to the year of deducton, but by a charge to ncome n the ater year. ( skn
Marne Co. v. Commssoner, 66 Fed. (2d), 776 Ct. D. 806, C. . III-1, 229
(193 ) ; Putnam ank v. Commssoner, 50 Fed. (2d), 158 Ct. D. 15, C. .
-2, 2 9 (1931) .) nd when property Is sod to be pad for n nstaments, and
ony part of what s pad s returned as gan, but the property s gotten back
wthout any refund, so that a that was receved turns out to be gan, the add-
ton s made to ncome n the year the addtona gan appears to be such. (Com-
pare Waker v. Coector, 119 Fed. (2d), 58.) So when a deducton for an e -
empt reserve s taken, and the reserve s reeased n a ater year, the reeased
fund s ta ed as ncome n the atter year though not earned then. (See Mary-
and Casuaty Co. v. Unted States, 2. 1 U. S., 3 2, 352; Commssoner v. Daas
Tte d Guaranty Co., 119 Fed. (2d), 211. See aso Wchta State ank v.
Commssoner, 69 Fed. (2d), 595 Ct. D. 8 7, C. . III-2, 187 (193 ) ;
Marne Transport Co. v. Commssoner, 77 Fed. (2(1), 177.) ven though the
appcabe reguatons be thought not whoy cear, we thnk the Commssoner s
acton was |ust and |ustfed.
It s further argued that snce the Revenue ct of 1932, secton 113(b) deat
wth ad|ustment of the bass for computng gan or oss n saes n respect of per-
centage and dscovery vaue depeton aowances pror to 1932 wthout re-
ferrng to the matter of eases endng wthout producton, no ad|ustment for the
atter can be had. We do not thnk our present probem s so reated to the pro-
vsons of that secton as to be affected by t. Nether a sae nor the cost bass
for computng gan or oss thereon s here nvoved.
In summaton, we are of opnon that where there s omsson or error n an
annua return, correcton generay s to be made on that return wthn the
statutes of mtatons; but n speca cases, because of msrepresented facts
creatng an estoppe, the ta payer n a ater return may be hed to those facts.
ut where the return s correct on the facts as they were when t was made, but
occurrences n a ater year ater the case, the ad|ustment s generay to be made
n the atter year. Ths does substanta |ustce, gves more stabty to the an-
nua ta settements, escapes the compcaton of mtaton statutes, and serves
admnstratve convenence. Ths case cones wthn the atter rue.
ffrmed.
rtce 23(m)-16: Charges to capta and to e pense
n the case of o and gas wes.
R NU CT OF 1936.
ppcabty of opton to e pense drng costs n connecton wth
varous knds of drng contracts. (See G. C. M. 2303 , page 75.)
rtce 23(m)-16: Charges to capta and to e pense
n the case of o and gas wes.
R NU CT OF 1936.
ppcabty of opton to e pense drng costs n connecton
wth varous knds of drng contracts. (See G. C. M. 232 3, page 78.)
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181 27(f), rt. 27(f)-.
S CTION 23(o). D DUCTIONS FROM GROSS INCOM :
C RIT L ND OT R CONTRI UTIONS.
rtce 23(o)-1: Contrbutons or gfts by ndvduas.
NU CT OF 1936.
Contrbutons to the Navy Reef Socety. (See I. T. 3550, page 10 .)
S CTION 23(q). D DUCTIONS FROM GROSS INCOM :
C RIT L ND OT R CONTRI UTIONS
Y CORPOR TIONS.
rtce 23(q)-: Contrbutons or gfts by corporatons.
R NU CT OF 1936.
Contrbutons to the Navy Reef Socety. (See I. T. 3550, page 10 .)
S CTION 27(f). CORPOR TION CR DIT FOR DI ID NDS
P ID: DISTRI UTIONS IN LI UID TION.
rtce 27(f)-: Dvdends pad credt for 19 2-19-11083
dstrbutons n qudaton. Ct. D. 1556
INCOM T R NU CT OF 1936 D CISION OF SUPR M COURT.
1. Dstrbutons n Lqudaton Credt fob Dvdends Pad.
corporaton makng a qudatng dstrbuton to ts parent cor-
poraton of cash and property consttutng surpus earned after
February 28, 1913, s entted, n computng ts undstrbuted profts
ta , to a dvdends pad credt under secton 27 (a) and (f) of the
Revenue ct of 1936 wth respect to such dstrbuton, even though
the qudaton comped wth secton 112(b)6 of that ct under
whch no gan or oss to the dstrbutee was recognzed as a resut
of such dstrbuton. Secton 27(f), reatng to dstrbutons n
qudaton, standng aone, |ustfes the deducton camed. Sec-
ton 27(h), whch denes a dvdends pad credt f any part of a
dstrbuton s not a ta abe dvdend In the hands of the ds-
trbutee, and secton 115(h), whch reates to dstrbuton of a
ta payer s stock or securtes, are not appcabe.
2. Reguatons adty.
The provsons of artce 27(f)- of Reguatons 9 , denyng a
dvdends pad credt under facts such as appear n ths case, are
not ony contradctory of the pan terms of secton 27(f) of the
Revenue ct of 1936, the anguage of whch s drect and unambgu-
ous, but attempt to add a suppementary egsatve provson and
are accordngy nvad.
3. Decsons ffrmed.
Decson of the Unted States Crcut Court of ppeas, Fourth
Crcut (122 Fed. (2d), 361 (19 1)), affrmng decson of the
Unted States oard of Ta ppeas ( 2 . T. ., 1020 (19 0)),
affrmed.
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f 27(f), rt. 27(0-1.1
182
Supreme Court of the Unted States.
uy T. everng, Commssoner of Interna Revenue, pettoner, v. Credt
ance Corporaton.
On petton for wrt of certorar to the Unted States Crcut Court of ppeas for the
Fourth Crcut.
pr 27, 19 2.
OPINION.
Mr. ustce Roberts devered the opnon of the Court
The Commerca Credt Co., a Deaware corporaton, acqured and owned
over 99 per cent of the capta stock of the respondent, a New York corpora-
ton actvey engaged n busness. In 1936 the respondent s stockhoders and
drectors resoved to qudate the corporaton and to make dstrbuton to
ts stockhoders n qudaton. Part of the dstrbuton so made n 1936 was
of cash and property consttutng surpus earned after February 28, 1913, of
the vaue of 950,73 . Of ths Commerca Credt Co. s share was 9 7,228.
Further dstrbutons were made n 1937 and fna dstrbuton n 1938, and
the corporaton was egay dssoved. The qudaton comped wth the pro-
vsons of secton 112(b)6 of the Revenue ct of 1936,1 under whch no gan
or oss for ta purposes was attrbutabe to Commerca Credt Co. as a resut
of the dstrbuton. That corporaton dd not, n 1936, dstrbute to ts stock-
hoders an| of the dstrbuton receved by t from the respondent and dd not
apporton or aocate any part thereof to the respondent.
The queston s, to what dvdends pad credt s the respondent entted
under the appcabe sectons of the Revenue ct of 1936.
y secton 1 there was mposed for the frst tme a ta upon undstrbuted
net ncome. In order to compute the base for ths evy the dvdends pad
credt s to be deducted from ad|usted net ncome.
Secton 27 deas wth the credt for dvdends pad. Subsecton (a) provdes
that, for the purposes of Tte I of the ct, the dvdends pad credt sha be
the amount of dvdends pad durng the ta abe year. ach of the addtona
subsectons deas wth a separate topc reatng to the computaton and aow-
ance of the credt. The ony ones here of mportance are (f) and (h).
(f) Dstrbutons n Lqudaton. In the case of amounts dstrbuted n
qudaton the part of such dstrbuton whch s propery chargeabe to the
earnngs or profts accumuated after February 28, 1913, sha, for the pur-
poses of computng the dvdends pad credt under ths secton, be treated as a
ta abe dvdend pad.
(h) Nonta abe Dstrbutons. If any part of a dstrbuton (ncudng
stock dvdends and stock rghts) s not a ta abe dvdend n the hands of
such of the sharehoders as are sub|ect to ta aton under ths tte for the
perod n whch the dstrbuton s made, no dvdends pad credt sha be
aowed wth respect to such part.
The ta payer nssts that the dstrbuton n queston s governed by the pro-
vsons of (f). The Government asserts that t s not, for these reasons: that
the phrase whch s propery chargeabe to the earnngs or profts, accumuated
after February 28, 1913, takes the dstrbuton out of the purvew of the
secton; that (h) denes the beneft of (f) to the ta payer f the money or prop-
erty transferred s not ta abe to the dstrbutee; that the pocy of the ct, and
the purpose underyng provsons other than secton 27, requre that (f) be
not construed as permttng the credt where the dstrbuton gves rse to no
ta upon the dstrbutee, and that an appcabe reguaton precudes the credt.
The Government s second contenton has been sustaned by the Crcut Court
of ppeas for the Ffth Crcut, but both the frst and t|e second have been
overrued by the Crcut Court of ppeas for the Second Crcut, and by the
oard of Ta ppeas and the court beow In the nstant case. In vew of
the confct we granted certorar.
9 Stat., 16 8. 1679.
Sectons 1 , 27. and 112. ( 9 Stat.. 16 8. 1635. 1665, 1678.)
Centenna O Co. v. Thoman (109 Fed. (2d), 359: utcheson, ., dssentng).
Commssoner v. ay Mfg. Corporaton (122 Fed. (2d), 3).
2 . T. ., 1020; 122 Fed. (2d), 361,
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183
27(f), rt. 27(0-1-
1. though a dstrbuton n qudaton of earnngs whch accrued subse-
quenty to February 28, 1913, does not consttute a dvdend n the proper sense
of the term, subsecton (f) categorcay decares that a qudatng dstrbu-
ton, to the e tent It s composed of such earnngs, sha, for the purposes of
computng the dvdends pad credt he treated as a ta abe dvdend pad.
Pany the secton ntends that a dstrbuton of such earnngs sha be con-
sdered a dvdend. Further t provdes that the dstrbutng corporaton may
use the amount n computng ts credt for dvdends pad. nd, to put the
matter beyond cav, the secton aso says that the dstrbuton sha be treated
as the payment to the dstrbutee of a ta abe dvdend.
The Government, however, contends that the cause propery chargeabe to
the earnngs or profts accumuated after February 28, 1913, means propery
chargeabe to the dstrbutee as such earnngs or profts. The argument has,
we thnk, rghty been re|ected by a the courts whch have consdered t.
The ne drawn In a of the Revenue cts between profts accumuated before
the enactment of the frst ncome ta ct and after that date for dstngush-
ng capta and Income furnshes the reason for the nserton of the cause n
subsecton (f). Secton 27 deas wth a credt to the dstrbutng corporaton
and the phrase fnds ts proper offce n mtng the amount of the dstrbuton
n qudaton whch may be consdered a dvdend from earnngs or profts as
dstngushed from one composed of capta. We, therefore, concude that (f),
standng aone, |ustfes the deducton camed by the respondent.
2. It s urged that the sweepng provson of (h) precudes the appcaton
of (f) n the crcumstances dscosed, because (h) denes the credt uness the
amount dstrbuted Is ta abe to the dstrbutee. y concesson the dstrbu-
ton here does not resut n gan or oss to the parent company. The argu-
ment s n effect that (h) creates an e cepton to the rue formuated by (f).
s above sad, each of the subsectons of secton 27 deas wth a specfc
and partcuar topc. Subsecton (f) deas wth dstrbutons n qudaton
whe subsecton (h) deas wth nonta abe dstrbutons. If (f) appes
n ths case, (h) s eft to cover a substanta fed of other sorts of dstrbu-
tons. We shoud, of course, read the two sectons as consstent rather than
confctng, f that be possbe. ere t Is not ony possbe but begets no
absurd or mpractca resut. We hod that (h) s not appcabe to the facts
of ths case and that (f) Is.
3. The pettoner ponts out that the Revenue ct of 1936 Introduced a new
pocy, to ta undstrbuted earnngs In order to prevent a ta payer from
accumuatng unta ed surpus by forcng the payment of dvdends whch
become ta abe In the hands of the dstrbutee. Ths s true, but t s aso
true that the ct made dstrbutons to parent corporatons nonta abe n order
to encourage the smpfcaton of corporate structures. It was avowedy for ths
reason that secton 112(b)6 provded that no gan or oss to the parent company
shoud n such case be recognzed, and t may we be that subsecton (f) of secton
27 was nserted wth the same purpose. The Government nssts that as secton
115(h) provdes that a dstrbuton of the ta payer s stock or securtes, or those
of another corporaton, sha not be consdered a dstrbuton of earnngs or profts
of the ta payer f no gan to the dstrbutee from the recept of such stock or
securtes s recognzed by the aw, subsecton (f) must be read n the ght of the
pocy thus decared by secton 115(h). The atter secton s rreevant to ths
controversy because the dstrbuton here was n property and money and not n
stock or securtes. Secton 115(h) was amended n 1938 subsequent to the con-
summaton of the transacton here n queston to Incude money or property, but
we can not, as the Government suggests, read nto the secton, as t stood when
the transacton took pace, an ntent derved from the pocy dscosed by the
subsequent amendment.
We sha not burden ths opnon by e tended reference to the egsatve
hstory of the ct of 1936. It s enough to say that t s nconcusve and, to
some e tent, supports the arguments of both partes. ut whatever may be
sad of the pocy behnd the statute s provsons, we are not at berty to
dsregard the drect and unambguous anguage of subsecton (f).
. Treasury Reguatons 9 , artce 27(f), decare that one makng a qu-
datng dstrbuton of earnngs accumuated snce February 28, 1913, must be
dened the dvdends credt n respect of such dstrbuton uness the amount
dstrbuted s ta abe n the same year to the dstrbutee, but further provdes
etmch v. emann (276 U. S., 233 T. D. 217. C. . II-2. 238 (1928)1).
9 Stat.. 1688.
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101, rt. 101-1.
18
that f the dstrbutee, In that year, makes a dstrbuton whch enttes It
to a dvdends credt t may aocate a proper proporton thereof to the ds-
trbutor of the qudatng dvdend. It s nssted that the stuaton presented
to the Treasury by the varous provsons of the Revenue ct of 1936 was
confused and compe and the adopton of the reguaton was proper n the
crcumstances and shoud contro.
In vew of what we have sad as to the pan meanng of subsecton (f),
we thnk that no compe ty or confuson s dscoverabe and that the regua-
ton not ony was contradctory of the pan terms of the subsecton but at-
tempted to add a suppementary egsatve provson, whch coud ony have
been enacted by Congress. We hod, therefore, that the court beow was rght
In refusng to gve effect to the reguaton.
The |udgment s affrmed.
The Chef ustce took no part n the consderaton or decson of ths case.
Mr. ustce ack, Mr. ustce Reed, and Mr. ustce Dougas dssent. Tney
are of the opnon that snce artce 27(f) of Treasury Reguatons 9 resoves
the ambgutes between secton 27(f) and secton 27(h) of the Revenue ct
of 1936 t s a vad nterpretatve reguaton and a proper e ercse of the
rue-makng authorty.
P RT I . CCOUNTING P RIODS ND M T ODS OF CCOUNTING.
S CTION . INST LLM NT SIS.
btce : Deferred-payment sae of rea property
not on nstament pan.
R NU CT OF 1936.
Reguatons 9 , amended. (See T. D. 5113, page 88.)
P RT . R TURNS ND P YM NT OF T .
S CTION 55. PU LICITY OF R TURNS.
R NU CT OF 1936.
Reguatons governng the nspecton of corporaton statstca
transcrpt cards by the Offce of Prce dmnstraton. (See T. D.
5120, page 97.)
SU TITL C SUPPL M NT L PRO ISIONS.
SUPPL M NT . R T S OF T .
S CTION 101. MPTIONS FROM T
ON CORPOR TIONS.
rtce 101-1: Proof of e empton.
R NU CT OF 1036.
Proof requred for certan casses of corporatons. (See T. D.
5125, page 101.)
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185 5 112(b), rt. 112(b)(5)- .
ktc|b 101(6)-1: Regous, chartabe, scentfc,
terary, and educatona organzatons and com-
munty chests.
R N CT OF 1930.
Corporaton organzed for the purpose of, and engagng n, bus-
ness actvty. (See G. C. M. 23063, page 103.)
rtce 101(6)-1: Regous, chartabe, scentfc,
terary, and educatona organzatons and com-
munty chests.
R NU CT OF 1936.
Navy Reef Socety. (See I. T. 3550, page 10 .)
SUPPL M NT . COMPUT TION OF N T INCOM .
S CTION 112(b). R COGNITION OF G IN OR LOSS:
C NG S SOL LY IN IND.
rtce 112(b) (5)-: Transfer of property to 19 2-2 -11125
corporaton controed by transferor. Ct. D. 1560
INCOM T R NG CT OF 1936 D CISION OF SUPR M COURT.
1. Gan ob Loss change of onds of ankrupt Corporaton
fob Stock n Nhw Corporaton Property Incudes qu-
tabe Interest.
The ta payers, owners of bonds of a subsdary corporaton whch,
wth ts parent, fed pettons n bankruptcy, receved n e change
for ther bonds common stock and ncome bonds of a new company
organzed pursuant to a pan of reorganzaton under secton 77 of
the ankruptcy ct. Under such pan the new company was to re-
ceve the assets of the debtor corporaton; the stockhoders of the
atter were to receve no nterest n the new corporaton, but n e -
change for ther stock were to receve warrants for purchase of
shares of the new corporaton; the new company was to assume the
obgatons of the bonds of the parent and to ssue ncome bonds
and common stock n e change for bonds of the subsdary. ed:
Under the facts, the transacton met the requrements of secton
112(b)5 of the Revenue ct of 1936 and no gan s recognzed a-
though the far market vaue of the new securtes e ceeded the bass
of the od. When stockhoders are e cuded and credtors of an
Insovent corporaton become stockhoders of the new corporaton,
the ownershp of the equty n the debtor corporaton effectvey
passes to the credtors at east when bankruptcy proceedngs were
nsttuted, and property as used In secton 112(b)F ncudes
such an equtabe nterest. benefca owner of. or equtabe
camant to, property Is not precuded from consummatng an e -
change whch quafes under secton 112(b)5 merey because the
actua conveyance Is made by hs trustee or tte hoder. Ths con-
cuson s supported by the egsatve hstory of secton 112(b)5.
2. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, Tenth Cr-
cut (19 1) (112 Fed. (2d), 380). affrmng decson of the Unted
States oard of Ta ppeas (19 0) ( 2 . T. ., 73), affrmed.
7 918 2 7
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( 112(b), rt. 112(b)(5)- . 186
Supreme Court of the Unted States.
Ouy T. cverng, Commssoner of Interna Revenue, pettoner, v. Cement
Investors, Inc.
uy T. everng, Commssoner of Interna Revenue, pettoner, v. ames .
Newton Trust.
Ouy T. everng, Commssoner of Interna Revenue, pettoner, v. ames .
Necton, r.
On wrts of certorar to the Unted States Crcut Court of ppeas for the Tenth Crcut
une 1, 19 2.
OPINION.
Mr. ustce Dougas devered the opnon of the Court
The ssue presented by these cases s whether under secton 112(b)5 of the
Revenue ct of 1936 ( 9 Stat., 16 S, 1678, 26 U. S. C, secton 112(b)5) the gan
of the ta payers from the transactons n queston shoud be recognzed.
The ta payers owned rst mortgage bonds of Coorado Industra Co. whch
was a whoy owned subsdary of the Coorado Fue Iron Co. The bonds were
guaranteed both as to prncpa and nterest by the parent company. fter
defauts on these bonds and on other bonds ssued by the parent company each
company ted a petton under secton 77 of the ankruptcy ct. pan of
reorganzaton was formuated by commttees of the securty hoders. It pro-
vded for the formaton of a new company to whch a the assets of the two
debtor companes woud be transferred. The new company woud assume the
obgatons of the bonds of the od parent company, Coorado Fue Iron Co., and
ssue ncome bonds and common stock n e change for the bonds of the od
subsdary company, Coorado Industra Co. The stockhoders of the debtor
companes woud receve no nterest n the new company; but n e change for
ther stock they woud receve warrants for the purchase of shares of the new
company. pprova of the pan by the requste percentage of securty hoders
was obtaned. The pan was contnned by the court n pr, 1936, and was
duy consummated as foows: The debtor companes, the bankruptcy trustee,
and the trustee under the ndenture securng the bonds of the od subsdary
company conveyed the assets of the debtors to the new company. The new
securtes were ssuabe to or on the order of the reorganzaton managers who
were actng, as stated n the pan, as agents of the securty hoders. The
reorganzaton managers effected an e change of the od securtes for the new on
or about September 1, 1936. Immedatey after the consummaton of the pan a
of the ssued shares of the new company (552,6G0 shares of common out of an
authorzed ssue of 1,000,000 shares) beonged to the former hoders of the
bonds of the od subsdary company. No stock was ssued by the new company
to other partes unt October, 1936. when 37 shares were ssued on e ercse of the
warrants. y une, 1938, ony 65 shares had been ssued to hoders of the
warrants.
ach of the ta payers n these cases e changed hs Coorado Industra Co.
bonds for ncome bonds and common stock of the new company. In each case
the far market vaue of the new securtes e ceeded the bass of the od. The
Commssoner determned defcences on the ground that the proft from the e -
change was a ta abe gan. The oard of Ta ppeas hed for the ta payers.
(See 2 . T. ., 73.) The crcut court of appeas affrmed (122 Fed. (2d), 380,
16) hodng, nter aa, that the e change met the requrements of secton
112(b) 5. We granted the pettons for certorar because the appcaton of
secton 112(b)5 to recevershp or bankruptcy reorganzatons rased mportant
probems n the admnstraton of the ncome ta aw.
It s pan from everng v. Southwest Consodated Corporaton (315 U. S.,
Ct. D. 15 , page 290, ths uetn ), whch nvoved dentca defntons of the
term reorganzaton as are nvoved here, that ths transacton does not meet
the requrements of secton 112(g)( ) of the 1936 ct.1 The assets of the od
1 In everng v. Southwest Consodated Corporaton, upra. no queston as to the ap-
geahty of secton 112(b) ) was nvoved. The ony ( eston rased or consdered by the
oan or the crcut court of appeas or passed on by ths Court was whether or not the
transacton n queston quafed as a reorganzaton under secton 112(g) of the
193 ct.
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187 5 112(b), rt. 112(b)(5)- .
companes were not acqured n e change soey for votng stock of the new
company, snce ncome bonds and warrants were aso ssued. It s aso cear
that the requrements of secton 112(g)(C) were not satsfed snce cause O
contempates that the od corporaton or ts stockhoders, rather than ts cred-
tors, sha be n the domnant poston of contro mmedatey after the trans-
fer and not e cuded or reegated to a mnorty poston. (Id., page .) ut
t does not necessary foow that secton 112(b)5 s nappcabe.
Secton 112(b)5 provdes:
No gan or oss sha be recognzed If property s transferred to a corporaton
by one or more persons soey In e change for stock or securtes n such cor-
poraton, and mmedatey after the e change such person or persons are n con-
tro of the corporaton; but n the case of an e change by two or more persons
ths paragraph sha appy ony f the amount of the stock and securtes receved
by each s substantay n proporton to hs Interest n the property pror to the
e change.
Contro Is defned n secton 112(h) to mean
the ownershp of stock possessng at east SO per centum of the tota combned
votng power of a casses of stock entted to vote and at east 80 per centum
of the tota number of shares of a other casses of stock of the corporaton.
If t may be sad that property was transferred by the bondhoders to the new
corporaton, then the other requrements of secton 112(b)5 were satsfed. For
the bondhoders, as owners of a of the outstandng shares of the new corpora-
ton were n contro of t mmedatey after the e change. nd t has not
been dsputed that the stock and ncome bonds acqured by each bondhoder were
substantay In proporton to hs Interest In the assets of the debtor companes
pror to the e chnnge. Pettoner, however, mantans that the ony transfer
wthn the meanng of secton 112(b)5 was effected by the debtor companes, the
bankruptcy trustee, and the ndenture trustee; and that the e change of the bonds
for the new securtes was merey part of the mechancs for consummaton of the
pan and not an e change by whch property was transferred to the new
corporaton. Though we agreed wth the atter proposton, t woud not neces-
sary foow that the requrements of secton 112(b)5 were not met.
In case of reorganzatons of nsovent corporatons the credtors have the rght
to e cude the stockhoders entrey from the reorganzaton pan. When the
stockhoders are e cuded and the credtors of the od company become the stock-
hoders of the new, It conforms to reates to date ther equty ownershp from
the tme when the processes of the aw were nvoked to enforce ther rghts of
fu prorty. ( crcrng v. abama sphat Ic Lmestone Co., 315 U. S., Ct
D. 15 2, page 21 , ths uetn).) Under that approach the ownershp of the
equty n these debtor companes effectvey passed to these credtors at east when
secton 77 proceedngs were Insttuted. ut however ther nterest n the prop-
erty may be descrbed, It ceary was an equtabe cam n or to t. It was that
equtabe Interest wth whch the pan deat. The transfer of the propertes of
the debtor companes to the new corporaton was made pursuant to that pan.
The pan was approved by the requste percentage of these credtors, as requred
by secton 77 (e) of the ankruptcy ct. Thus t Is far to say that the prop-
erty transferred was property n whch the credtors had an equtabe nterest
and that the transfer was made wth ther authorty and on ther behaf. Cer-
tany property as used n secton 112(b)5 ncudes such an Interest n property.
nd we see no reason to concude that a benefca owner of, or equtabe camant
to, property Is precuded from consummatng an e change whch quafes under
secton 112(b)5 merey because the actua conveyance Is made by hs trustee or
tte hoder. In stuatons comparabe to ths one the oard of Ta ppeas has
hed that secton 112(b)5 s appcabe. (Lecke v. Commssoner, 37 . T. .,
252; Mer d Pane v. Commssoner, 2 . T. ., 580. Cf. Rockford rck d Te
Co. v. Commssoner, 31 . T. ., 537.) We accept Its vew.
The egsatve hstory of secton 112(b)5 supports that concuson. Secton
112(b)5 and the reorganzaton provsons are rather cosey reated. (See
Mer, endrcks, and verett, Reorganzatons and Other changes n Income
Ta aton (1931), ch. 6.) Whe the reorganzaton provsons are restrcted to
ntercorporate transactons, secton 112(b)5 s not so confned, snce the phrase
one or more persons ncudes ndvduas, trusts or estates, partnershps and
corporatons. (Treasury Reguatons 0 , artce 112(b) (5)-.) ut there s no
Indcaton that the reorganzaton provsons were desgned as the e cusve
method of deferrng recognton of gan or oss In a cases of corporate read|ust-
ments or reorganzatons. The hstory of secton 112(b)5 makes cear that It too
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133(a), rt. 131(a)(2)- .
188
was desgned to functon In that fed ( mercan Compress Warehouse Co. v.
ender, 70 Fed. (2d), 655, 657-658) and to permt deferment of gans or osses
where there has been a mere change In the form of ownershp or where the ta -
payer has not cosed out a osng venture. (Portand OU Co. v. Commssoner,
109 Fed. (2d), 79, 88.) Secton 112(b)5 derves from secton 202(c)3 of the
1921 ct. ( 2 Stat., 229, 230.) Its egsatve hstory shows that It was desgned
to permt read|ustments wthout present recognton of gan or oss by aow-
ng property to be transferred to a controed corporaton by an ndvdua, a
partnershp, a corporaton, or others. (See earngs, Senate Commttee on
Fnance, proposed Revenue ct of 1921, S ty-seventh Congress, frst sesson, May
9-27,1921, pages 536-537, 5 6, 557-558; Mag, Ta abe Income (1936), pages 123-
131.) If a transacton meets the requrements of secton 112(b)5, the bass of the
property n the hands of the acqurng corporaton s the same as t woud be
n the hands of the transferor. (Secton 113(a)8.) (See P. . rren d Son,
Inc., v. Commssoner, 116 Fed. (2d), 718.) smar resut obtans n case of a
transacton whch quafes as a reorganzaton. (See secton 113(a)7( ).)
nd the theory underyng the two basc provsons s the same. (Mer, en-
drcks, and verett, op. ct., pages 30 , 0 ; S. Rept. No. 398, S ty-eghth Congress,
frst sesson, Commttee Reports on the evenue cts, 1913-1938, C. . 1939-1
(Part 1), pages 278-279.) The cose reatonshp between secton 112(b)5 and the
reorganzaton provsons s further evdenced by the fact that they overap to
a degree. Thus a transacton whch meets the requrements of cause or cause
C of secton 112(g) may aso quafy under secton 112(b)5. In short, the reor-
ganzaton provsons do not furnsh the e cusve methods for securng a defer-
ment of gans or osses arsng out of transactons popuary known as corporate
read|ustments or reorganzatons. The nstant transacton comes fary wthn
the famy of busness read|ustments for whch secton 112(b)5 was desgned.
ence the fact that t can not meet the statutory standards of a reorganzaton
does not necessary mean that t can not quafy as an e change, any more than
the faure to satsfy one cause of the reorganzaton provsons means that
none can be satsfed.
ut the argument seems to be that even though there was an e change
whch met the requrements of secton 112(b)5, there was nevertheess a gan
whch s ta abe. That gan, t s suggested, arose from the acquston by the
ta payers of ther equtabe nterest n the propertes n substtuton for ther od
bonds. nd t s argued that unke the stuaton whch obtans under the
reorganzaton provsons ( everng v. abama sphatc Lmestone Co.,
supra), secton 112(b)5 covers ony the e change tsef and not the antecedent
steps n connecton wth a pan of reorganzaton. Thus the contenton seems
to be that snce a gan arose from a transacton whch was separate and dstnct
from and anteror to the e change of property for the new securtes, t must
be recognzed under the genera rue of secton 112(a). We e press no vew on
that contenton. The defcences were not assessed on that transacton but
ony upon the e change of stock and securtes n the new corporaton for bonds
of the od. We w not consder here for the frst tme the queston whether a
ta abty may have been ncurred under secton 112(a) by reason of the
earer transacton, a queston not fary wthn the ssues as framed by the
Commssoner and hence not decded beow. (Cf. everng v. Wood, 309 D. S.,
3 , 3 9.)
ffrmed.
S CTION 113(a). D UST D SIS FOR D T RMINING
G IN OR LOSS: SIS (UN D UST D) OF PROP RTY.
rtce 113(a) (2)-: Property transmtted by gft after
December 31, 1920.
R NU CT OF 1936.
Reguatons 9 , amended. (See T. D. 5137, page 110.)
. Rept. No. 350, S ty-seventh Congress, frst sesson : S. Rept. No. 275, S ty-seventh
Congress, frst sesson. Commttee Reports on the Revenue cts, 1913-1938 (C. . 1939-1
(Part 1), pages 175-176, 188-189.
For the resut whch woud otherwse obtan n such stuatons see Insurance Tte
Ouarantee Co. v. Commtsoner (36 Fed. (2d), 8 2 Ct. D. I S, C. . I -1, 279 (1930) ),
and cues cted.
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189 tt 131, rt. 131-8.
btce 113(a) (3)-1: Transfer n trust after December 31, 1920.
R NU CT OF 1936.
Reguatons 9 , amended. (See T. D. 5137, page 110.)
S CTION 115. DISTRI UTIONS Y CORPOR TIONS.
rtce 115-7: Stock dvdends.
R NU CT OF 1938.
Reguatons 9 , amended. (See T. D. 5110, page 160.)
S CTION 117. C PIT L G INS ND LOSS S.
rtce 117-1: Meanng of capta assets.
R NU CT OF 1936.
Gan from retrement of Chcago ont Stock Land ank bonds.
(See I. T. 3531, page 223.)
rtce 117-1: Meanng of capta assets.
R NU CT OF 1936.
cceptance by credtor of vountary conveyance of property, ncud-
ng property pedged as securty for the debt, n parta or n fu
satsfacton of the unpad porton of the ndebtedness; I. T. 3121 (C. .
1937-2,138) modfed and I. T. 3167 (C. . 1938-1,190) revoked. (See
I. T. 35 8, page 7 .)
SUPPL M NT C CR DITS G INST T .
S CTION 131. T S OF FOR IGN COUNTRI S ND
POSS SSIONS OF UNIT D ST T S.
rtce 131-8: Lmtatons on credt for foregn ta es.
R NU CTS OF 19S6 ND 1937.
Credt aowabe to domestc corporaton for ta es pad by foregn
subsdary. (See Ct. D. 1561, page 161.)
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1 5, rt. 1 5-1.
190
SUPPL M NT D. R TURNS ND P YM NT OF T .
S CTION 1 5. P N LTI S.
rtce 1 5-1: Penates. 19 2-3-10961
Ct. D. 1537
INCOM T R NU CTS OF 1932, 193 , ND 1936 D CISION OF SUPR M
COURT.
1. vason of Ta Indctment for Conspracy to oate, and fob
oaton of, Fedeba Statute Dstrbuton of Corporate
Dvdends Under Guse of Commssons Submsson to ury
of ueston of Reasonabeness of owance for Persona
Servces Suffcency of vdence.
In the prosecuton of certan sharehoders and e ecutves of a
corporaton for conspracy to voate, and for voaton of, secton
1 5 of the Revenue cts of 1932, 193 , and 1936, n attemptng to
evade Federa ncome ta es of the corporaton through a fraudu-
ent scheme whereby, under the guse of payng commssons, whch
were deducted from gross ncome, the corporaton dstrbuted dv-
dends deducton of whch the statute does not permt, t was not
error to submt to the |ury the queston of whether or not the
defendants wfuy attempted to make unreasonabe aowances for
persona servces, where from the evdence t appeared that some
such servces were performed. The evdence was suffcent to afford
the |ury a ratona bass upon whch to concude that the sums
deducted as commssons were more than a reasonabe aow-
ance for compensaton for the servces rendered.
2. Constructon of Pena Statute.
Secton 1 5 of the Revenue cts of 1932, 193 , and 1936, standng
aone, are not vague nor do they deegate pocy-makng powers to
ether court or |ury. The mere fact that a pena statute s so
framed as to requre a |ury upon occason to determne a queston
of reasonabeness s not suffcent to make t too vague to afford a
practca gude to permssbe conduct.
Supreme Court of the Unted States.
The Unted States of merca, pettoner, v. ames M. Ragen.
The Unted States of merca, pettoner, v. rnod W. ruse.
The Unted States of merca, pettoner, v. Lester . ruse.
On wrts of certorar to the Unted States Crcut Court of ppeas for the Seventh Crcut.
anuary 5, 19 2.
opnon.
Mr. ustce ack devered the opnon of the Court.
Secton 1 5 of the Revenue ct of 1932 provdes that any person who w-
fuy attempts n any manner to evade or defeat any ta mposed by ths tte
or the payment thereof, sha, n addton to other penates provded by aw, be
guty of a feony . ( 7 Stat., 217.) (There are dentca provsons In
the Revenue cts of 193 and 1936.) ( 8 Stat, 725; 9 Stat., 1703.) Pettoners
were ndcted, tred, and convcted n the dstrct court for conspracy to voate,
and for voaton of, ths provson. The crcut court of appeas, one |udge ds-
sentng, reversed. (Unted States v. Moasky. 118 Fed. (2d), 128.) ecause
questons of mportance n the enforcement of ths crmna statute and the ad-
mnstraton of the revenue aws were rased, we granted certorar. (313
U. S.( 557.)
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191
1 5, rt. 1 5-1.
In computng net corporate ncome sub|ect to ta , a deducton s permtted for
a the ordnary and necessary e penses pad or ncurred durng the ta abe
year n carryng on any trade or busness, ncudng a reasonabe aowance for
saares or other compensaton for persona servces actuay rendered .
(Sec. 23(a), Revenue cts of 1932, 193 , and 1936.) ( 7 Stat., 179; 8 Stat., 688;
9 Stat., 1658.) Dvdends dstrbuted from net corporate profts are not aow-
abe deductons. ut commssons, If ncurred as necessary busness e penses
and as a reasonabe aowance for persona servces actuay rendered, are deduct-
be from gross Income. The arger the aowabe deducton the smaer are the
net ta abe Income and the ta mposed. The frst four counts of the ndctment
set out attempts by the defendants to evade ncome ta es of the Consensus Pub-
shng Co. for the years 1933 to 1936, through a frauduent scheme whereby,
under the guse of payng commssons whch were deducted from gross ncome,
the corporaton dstrbuted dvdends deducton of whch the statute does not
permt. The ffth count sets out a conspracy to accompsh smar resuts for
the years 1929 to 1936.
fter an e amnaton of the evdence n the record ncudng numerous e hbts,
we are satsfed that the ury coud |ustfaby have found the foowng facts
to be true:
The Consensus Pubshng Co., an Inos corporaton, was organzed n 1929
to carry on the busness of preparng run-down sheets, day buetns contan-
ng nformaton on horse racng, and seng tht n to bookmakers. The orgna
stock ownershp was dstrbuted among rnod ruse (20 shares), ames Ragen,
Sr. (20 shares), Wam Moasky (30 shares), and Cecea Investment Co. (30
shares), a hodng company controed by Moses nnenberg, the domnant fgure
n severa other corporatons whch were engaged n enterprses connected wth
bettng on horse races. ruse and Ragen were e ecutves n other nnenberg
companes. Moasky aone ved n St. Lous, where Consensus conducted ts
prncpa busness operatons, but he deegated to one Gordon rooks, an empoyee
of another corporaton owned by Moasky, the |ob of coectng recepts, preparng
records and reports, and supervsng prntng for Consensus, work whch took
rooks an hour and a haf a day on the average e cept for the one day each
week when the preparaton of operatng reports for the Chcago offce requred
about three hours.
For severa years Consensus made a weeky dstrbuton of money to ts share-
hoders n drect proporton to ther hodngs. In the perod covered by the
ndctment, ony the 30 per cent of the dstrbuton gong to Cecea Investment
Co. was treated as dvdends n Consensus ta returns. The remanng 70 per
cent, athough referred to n some of the corporaton s confdenta weeky reports
to stockhoders durng the perod as dvdends, was nevertheess n ts Income
ta return deducted from gross ncome as commssons. The deductons thus
camed were 10,761 n 1929, 62,961 n 1930, 0 ,791 n 1931, 57,255 n 1932,
5 ,538 n 1933, 60,172 n 193 , 76,71 n 1935, and 119,756 n 1936. The book-
keepng system under whch 70 per cent of the funds remanng after payment of
e penses was charged as commssons was set up n 1929 n accordance wth
nstructons from rnod ruse.
In 193 , ruse, havng earned of a decson of the oard of Ta ppeas that
dstrbutons of profts as commssons woud not be aowed as a deductbe
e pense f made n accordance wth stock hodngs, set n moton a seres of
transactons retroactvey modfyng the reatonshp between Consensus and ts
stockhoders. e drected an empoyee to destroy the orgna stock book of the
company, ssue new stock certfcates bearng the date of ncorporaton (Septem-
ber 18, 1929), and then mmedatey to came the new certfcates and ssue a
snge certfcate for 100 shares to the Cecea Investment Co. In 1935 or 1936,
ruse ordered the drawng up of wrtten yeary contracts of empoyment for the
severa years from 1930 on between Consensus and the ndvduas to whom
commsson payments had snce the ncepton of the company been made. In
each contract, the compensaton was to correspond Identcay wth the amount
that had aready actuay been pad.
cept for deays n destroyng the orgna stock book and the orgna stock
certfcates, ths pan was prompty carred out. Moreover, corporate mnutes
were drawn up. appropratey back dated, whch set out the stock Issue and
the empoyment contracts as f they were actua events contemporaneous wth the
fase dates of recordng.
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192
mong the back dated contracts were severa between Consensus and the
respondent Lester ruse, son of rnod. These together wth a back dated
assgnment by rnod to Lester of hs contract of empoyment wth Consensus
were to afford ostensbe documentaton of a shft to Lester, after March, 1933,
of the share that had formery gone to rnod.1 Smary, after 1931, Con-
sensus pad the share that had formery gone to Ragen to Ragen s son. ere,
too, a set of back dated papers documentng the shft was fabrcated. fter
ther sons became the nomna recpents of commssons, ruse and Ragen
contnued to be connected wth the affars of Consensus. ruse, for e ampe,
drected the creaton of the spurous papers and records aready descrbed, and
Ragen from tme to tme at east unt 1935 sgned commsson checks of
Consensus whch were pad n reguar course.
If, from the foregong and other supportng evdence In the record, the |ury
coud have found that any one of the defendants had, wth the Intentona
cooperaton of the others, receved commssons wthout renderng any
servces whatsoever, It woud have been possbe for the tra |udge to have
submtted the case to the ury wthout cang upon It to decde any questons
of reasonabeness of compensaton for servces actuay rendered. If, however,
each defendant had performed some servce for the corporaton, the |ury woud
have had to consder whether or not the commssons had ntentonay
been made e cessve so that a porton of payments made n the guse of meet-
ng e penses actuay consttuted a dstrbuton of dvdends. There was ev-
dence whch, f beeved, tended to estabsh that each defendant had performed
some servce, athough of an rreguar and undefned nature. ence, t seems
to us entrey proper for the tra |udge to have submtted the case to the ury
wth a charge not necessary cang for a determnaton of whether a or
none of the commssons pad to each defendant were dvdends, but per-
mttng a determnaton of whether the commssons were ntentonay made
to ncude substanta amounts whch shoud have been treated as dvdends.
Upon such a charge, the |ury found rnod ruse and Ragen guty on a fve
counts, and Lester ruse guty on counts and 5.
In the charge as gven, the crcut court of appeas found reversbe error.
The gst of the court s argument Is contaned In the foowng e cerpt from
the opnon:
We have reached the concuson that where a statute permts a reasonabe
deducton for servces, a crmna prosecuton can not be mantaned by proof
other than that such servces were not rendered. It Is not suffcent to aege
or prove that a deducton camed for servces s unawfu because the amount
1 Or to hs wfe. From ugust, 1932, to March, 1933, Consensus dstrbuted 20 per cent
of Its earnngs to Mrs. rnod ruse. No e panaton Is apparent In the record.
ecause of ths and other crcumstances showng Ragen s contnued partcpaton n the
affars of Consensus, we concude that the argument, separatey made on hs behaf, that
there was Insuffcent evdence to estabsh hs connecton wth any scheme to evade ta es.
Is wthout mert.
The cruca portons of the dstrct |udge s charge to the ury are as foows :
If these sums dstrbuted were dstrbuted as a part of the profts of the corporaton,
then they shoud have been accounted for n the ncome ta report to the Consensus com-
pany as profts and upon that the corporaton shoud have pad a ta , whch It dd not.
If, on the other hand, they were Intended to and represented actua bona fde compen-
saton to empoyes of ths corporaton n the ordnary operaton of ts busness ; n other
words, f they were ordnary and necessary e penses of the operaton of the busness, then
they were propery deductbe as they were deducted and no ta was due upon them.

We are concerned ony wth the queston of whether these men have entered Into a con-
spracy, nto a scheme whereby as a resut ths corporaton, the Consensus company, under
toe guse of commssons, dstrbuted to Its sharehoders sums that actuay represented a
dvson of profts.
If these defendants had that knd of pan and carred It out. If they wfuy and Inten-
tonay entered Into such an arrangement, there woudn t be any queston of ther gut.

It Is not necessary for the Government under ths Indctment to prove that a of the sums
bo dstrbuted to these defendants were profts. It s not necessary that the Government
prove a of the fgures precsey as they are charged In the ndctment. It Is suffcent If
you fnd beyond a reasonabe doubt that the defendants Intentonay dverted profts of
ths concern, n the amount charped n the ndctment or substanta parts thereof, dverted
them from the form of profts and receved them n the form of commsson.
1 Moasky, ames Ragen, r., and the Consensus Pubshng Co. were aso found guty.
The Government has not sought revew of the crcut court of appeas reversa of the con-
vcton of Moasky and ames Ragen, r., whch Invoved addtona Issues of no reevance
to the respondents here. The corporaton dd not take an appea from the |udgment of the
dstrct court.
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193
t 1 5, rt. 1 5-1.
charged s unreasonabe. Such a charge woud eave to the trer of the facts
the responsbty for f ng the standard by whch a defendant s gut woud be
determned. The standard woud vary accordng to the vews of dfferent courts
and |ures. Such a theory woud be voatve of the defendant s consttutona
rghts, and vod. (Unted States v. L. Cohen Grocery Co., 255 U. S., 81 ;
Internatona arvester Co. v. entucky, 23 U. S., 216, 221 ; Cons v.
entucky, 23 U. S., 63 , 638 )
Determnaton of aowabe deductons by reference to a standard of rea-
sonabeness s not unusua under Federa Income ta aws. For e ampe, the
deductons aowed for deprecaton and obsoescence, for bad debts, and for
ordnary and necessary busness e penses (other than compensaton for servces)
are desgnated n the Interna Revenue Code as reasonabe. (53 Stat., 1,
sees. 23(1), 23(k), 23(a).) If, as the opnon beow suggests, the ony
queston that can propery be submtted to the |ury s whether the entre
deducton s fabrcated, an unconsconabe ta payer can mmunze hmsef from
the crmna sanctons for ta evason by the smpest of e pedents. e need
ony fnd a egtmate tem of deducton and then pad t as much as hs purpose
requres. y transformng the queston Shoud any deducton have been
made nto Was the deducton made n e cess of a reasonabe aowance
he can, f the theory accepted beow be correct, argey destroy the deterrent
effect of a pena statute passed by Congress.
We have concuded, however, that the ground of decson beow s untenabe.
The mere fact that a pena statute s so framed as to requre a |ury upon
occason to determne a queston of reasonabeness s not suffcent to make t
too vague to afford a practca gude to permssbe conduct. (Cf. Nash v.
Unted States, 229 U. S., 373.) The cases cted by the court of appeas affrm
no such proposton. In the Cohen Grocery case, ths Court hed a convcton
under secton of the Lever ct ( 1 Stat., 297, 298) unconsttutona because
the statute eft open the wdest concevabe nqury, the scope of whch no
one can foresee and the resut of whch no one can foreshadow or adequatey
guard aganst, and because an attempt to enforce the secton woud be the
e act equvaent of an effort to carry out a statute whch n terms merey
penazed and punshed a acts detrmenta to the pubc Interest when un|ust
and unreasonabe n the estmate of the court and |ury. (Unted States v.
Cohen Grocery Co., supra, 89.) In the Internatona arvester case, ths Court
e pressed the vew that assurance that the State statute there n ssue was com-
ped wth caed for gfts that manknd does not possess. (Internatona
arvester Co. v. entucky, supra, 22 .) nd n the Cons case, the same
statute was sad to ca for a determnaton of conduct not accordng to the
actuates of fe, or by reference to knowabe crtera, but by specuatng upon
magnary condtons. (Cons v. entucky, supra, 638.)
No such unworkabe standards are nvoved here. Secton 1 5 of the Revenue
ct of 1932 standng aone s not vague nor does It deegate pocy makng
powers to ether court or ury. It decares that any person who wfuy
attempts n any manner to evade or defeat any ta mposed by the ct
sha be guty of a feony and specfes penates n addton to
those otherwse provded by aw. That such acts of bad fath are not beyond
the ready comprehenson ether of persons affected by the ct or of |ures
caed upon to determne voatons need not be eaborated. Nor does the
partcuar mode of evason here aeged, ntentona deducton of dvdends n
the guse of compensaton for persona servces, so transform the nature of
the offense as to make the actors ess aware that they are commttng t or
ures ess competent to detect t. The statutory specfcaton of permssbe
deducton here n queston Is of ong standng. For years thousands of corpo-
ratons have fed ncome ta returns n accordance wth the drecton to deduct
a reasonabe aowance for saares or other compensaton for persona servce
actuay rendered, and there has not been any apparent genera confuson
bespeakng nadequate statutory gudance. fndng of unconsttutona un-
certanty n ths secton of the ct as apped here woud be a negaton of
e perence and common sense.
On no constructon can the statutory provsons here nvoved become a trap
for those who act n good fath. mnd ntent upon wfu evason s ncon-
sstent wth surprsed Innocence. (Cf. Gorn v. Unted States, 312 U. S., 19:
Unted tatet v. Moatky, supra, 139.
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19
ygrade Provson Co. v. Sherman. 206 U. S., 97; Omaechevarra v. Idaho,
2 6 U. S.. 3 3.) nd the charge gven by the tra court ampy nstructed
the ury that scenter s an essenta eement of the offense.
We concude that t was not error to submt to the |ury the queston of
whether or not the respondents attempted to make unreasonabe aowances
for persona servces. The respondents, however, rase a further ob|ecton
gong not to the proprety of such a submsson as a matter of aw, but to the
nsuffcency of the evdence upon whch the |ury coud have found an answer
to the queston submtted. They contend that the record dscoses that the
recpents of commssons performed some servces; that the record fas to
show that the servces dscosed were the ony servces rendered: that there
was no drect testmony as to the tota amount of servces rendered or the
reasonabe vaue thereof; and that, therefore, the |ury had no ratona bass
upon whch to concude that the sums deducted as commssons were more
than a reasonabe aowance for compensaton for the servces rendered. We
must re|ect ths contenton.
The busness conducted by Consensus, a busness whch, accordng to the test-
mony of a person who was n mmedate charge of ts ma|or operatons, normay
requred ony an hour and a haf day of managera supervson, woud hardy
seem to ca for addtona e ecutve servces worth what Consensus pad In
commssons. The same wtness testfed that he had never seen some of the
recpents of commssons, and that hs ony contact wth one of them was two
teephone conversatons. Ths testmony, too, bees partcpaton by the respond-
ents n the busness actvtes of Consensus to a degree |ustfyng payment of the
hgh commssons equa on the average to about haf of gross revenues and
amountng each year to severa tmes a other wages and saares as a qud,
pro qud for ther servces. Moreover, there s the addtona crcumstance,
damagng to the respondents contenton, that year n and year out, 30 per cent
of earnngs after deducton of e penses was pad to the Cecea Investment Co. as
dvdends, and 70 per cent to the respondents or other ndvduas as comms-
sons. Ths unformty n the computaton of compensaton Is dffcut to
reconce wth the varatons n e tent and knd of persona servces whch one
woud e pect to fnd n accounts refectng bona fde aowances for persona
servces. Further, there s the crcumstance that the commsson payments
were aways n proporton to orgna stock hodngs. nd darkenng the whoe
pcture s the atmosphere of purposefu conceament evnced by the destructon
of some mportant corporate papers and the fabrcaton of others. We are con-
vnced that a of ths s suffcent to support a fndng by. the ury that the re-
spondents wfuy attempted to make unreasonabe aowances for persona
servces.
The respondents aso urge that there was a fata varance between the ndct-
ment and the proof n that the ndctment aeges that the commsson payments
were actuay dvdends In ther entrety whereas the evdence Indcates that
some servces were performed. The ffth count of the Indctment does refer to
a of the moneys pad by vrtue of the so-
caed empoyment contracts as In truth and n fact, dstrbutons of profts
and dvdends. ut the gravamen of the charge s dstrbuton of dvdends n
the guse of commssons, and the respondents can not fary cam that they
were not adequatey apprsed of the nature of the offense. ny varance whch
e sted, at most a matter of the e tent of the aeged ta evason, nvoves no
eements of surprse pre|udca to the respondents efforts to prepare ther
defense. (Cf. erger v. Unted States, 295 U. S., 78; ennett v. Unted States,
227 U. S.. 333.)
The respondents have made further contentons whch we concude after con-
sderaton are wthout mert.
The |udgment of the crcut court of appeas s reversed and that of the dstrct
court affrmed.
It s so ordered.
Mr. ustce Robebts, Mr. ustce Mubphy, and Mr. ustce ackson took no
part n the consderaton or decson of ths case.
In 1936, for e ampe, commssons amounted to 119,75C as compared wth 8,810
pad out for other wages and saares.
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195 | 162, rt. 162-1.
SUPPL M NT . ST T S ND TRUSTS.
S CTION 161. IMPOSITION OF T .
rtce 161-1: Imposton of the ta .
R NU CT OF 1036.
Trust ncome sub|ect to uncondtona demand of ta payer-bene-
fcary. (See G. C. M. 2316 , page 168.)
S CTION 162. N T INCOM .
rtce 162-1: Income of estates and trusts.
R NU CT OP 1936.
Trust ncome sub|ect to uncondtona demand of ta payer-bene-
fcary. (See G. C. M. 2316 , page 168.)
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22(a), rt. 22(a)-20. 196
INCOM T RULINGS. P RT III.
R NU CTS OF 1935 ND 193 OR PRIOR CTS.
SU TITL . G N R L PRO ISIONS.
P RT II. COMPUT TION OF N T INCOM .
S CTION 22(a). GROSS INCOM : G N R L
D FINITION.
rtce 22(a)-20: Income to essor corporaton 19 2-5-10978
from eased property. Ct. D. 15 0
INCOM T R NU CTS OF 1928, 1932, ND 193 D CISION OF SUPR M
COURT.
1. Gross Income Payments of Dvdends by Lessee to Stock-
hoders of Lessor, Under Lease n Perpetuty Wth No
Defeasance Cause Federa Ta es Pad on Such Dv-
dends Income to Lessor.
Under the provsons of a ease n perpetuty, wth no defeasance
cause, the essee of raroad property pad drecty to the stock-
hoders of the essor corporaton annua dvdends on the par vaue
of ts shares wthout deducton for any Federa ta es, and pad a
ta es due to the Unted States on account of such dvdends.
ed: The dvdend payments made to the essor s stockhoders and
the Federa ncome ta es pad on account thereof consttute ncome
reazed by the essor and are propery ta abe to t.
2. Decson Foowed.
Lucas v. ar (281 U. S., I) (1930), foowed.
S. adty of Reguatons.
rtce 70 of Reguatons 7 and 77, and artce 22(a)-20 of Regu-
atons 86, are vad.
. Decson Reversed.
Decson of the Unted States Crcut Court of ppeas, Seventh
Crcut (118 Fed. (2d), 17 (19 1), reversed.
Supreme Court of the Unted States.
The Unted States of merca, pettoner, v. oet Chcago Raroad Co.
On wrt of certorar to the Unted States Crcut Court of ppeas for the Seventh Crcut.
anuary 19, 19 2.
OPINION.
Mr. ustce Dougas devered the opnon of the Court.
y an ndenture denomnated a ease respondent n 186 granted, demsed
and eased to Chcago ton Raroad Co. a of Its raroad property, rea
and persona. The ease was In perpetuty upon specfed terms and cond-
tons. The Chcago ton Raroad Co. covenanted and agreed, nter aa, to
guarantee and pay quartery to the hoders of the 15,000 shares of capta
stock of respondent an annua dvdend of 7 per cent on the par vaue of the
shares; to depost wth a desgnated depostory specfed monthy sums to be
paced to the credt of the stockhoders and to be hed as a fund for the purpose
of payng the dvdends; to pay the dvdends wthout any deducton for any
Federa ta whatsoever; to pay a ta es whch may be due to the Unted
States on account of sad dvdend so pad from tme to tme ; and to pedge
to respondent 87 parts out of 257 of the gross recepts of the ne between the
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( 22(a), rt. 22(a)-20.
ctes of ton and Chcago for the purpose of securng the performance of ts
varous covenants. The ease contaned no defeasance cause.
The annua dvdend s 7 per share and totas 105,000. Ths amount has
been pad drecty to respondent s stockhoders every year snce 186 by Ch-
cago ton Raroad Co. unt acquston of the property n 1931 by the ton
Raroad Co., and snce then by the atter company. The dspute here s over
Federa ncome ta es for the years 1931, 1932, 1933, and 193 . Respondent, a
corporaton organzed and e stng under the aws of Inos, fed ts ncome
ta return for each of those years reportng the 105,000 of dvdends pad ts
sharehoders as ts ncome. The resutng ta was pad each year by the ton
Raroad Co. In addton the atter pad each year for respondent an add-
tona ta on the amount of the ncome ta on 105,000 on the theory that the
atter consttuted addtona ta abe Income to respondent. Respondent fed
cams for refund for the addtona ta pad n 1931 and for a the ncome
ta es pad .on ts behaf for the other years n queston on the theory that the
ncome on whch those ta es were pad was not reazed by t. On re|ecton
of those cams by the Commssoner respondent nsttuted sut n the dstrct
court. That court rendered |udgment for the pettoner. The crcut court of
appeas reversed, one |udge dssentng. (118 Fed. (2d), 17 .) We granted
the petton for certorar because of the confct between that decson and the
governng prncpes of God d Stock Teegraph Co. v. Commssoner (83 Fed.
(2d), 05 Ct. D. 119 , C. . 1937-1, 262 ), Unted States v. Northwestern Tee-
graph Co. (83 Fed. (2d), 68), and Pacfc d tantc Teegraph Co. v. Comms-
soner (83 Fed. (2d), 69 Ct. D. 1195, C. . 1937-1, 266 ), decded by the Crcut
Court of ppeas for the Second Crcut.
Respondent urges, and the court beow hed, that ths so-caed ease n per-
petuty wthout a defeasance cause dvested respondent of a rght, tte and
nterest n the property and vested a fu and ndefeasbe tte n the grantee.
(See uck v. Chcago d ton Raroad Co., 86 111.. 352, 35 -355; Chcago, urng-
ton d uncy R. R. Co. v. oyd, 118 111.. 73.) Respondent aso argues that the
Indenture of 186 vested a rghts to payment of dvdends n Its stockhoders and
dvested t of any rght to, or contro over, such payments. Respondent therefore
contends that a corporaton whch does not own or contro property and has no
rght to, or contro over, any Income from the property can not be n recept of
ncome, constructvey or otherwse.
Such consderatons do not dspose of ths controversy. In Lucas v. ar (281
U. S., I), ths Court hed that a husband s saary was ta abe to hm though by
contract wth hs wfe haf of t vested In her when pad. Mr. ustce omes sad
(pages 11 -115) : There s no doubt that the statute coud ta saares to those
who earned them and provde that the ta coud not be escaped by antcpatory
arrangements and contracts however skfuy devsed to prevent the saary when
pad from vestng even for a second n the man who earned t. That seems to us
the mport of the statute before us and we thnk that no dstncton can be taken
accordng to the motves eadng to the arrangement by whch the fruts are
attrbuted to a dfferent tree from that on whch they grew.
Precsey that approach was taken n artce 70 of Treasury Reguatons 7 .
promugated under the Revenue ct of 1928. It provdes n part:
Where a corporaton has eased ts property n consderaton that the essee
sha pay n eu of other renta an amount equvaent to a certan rate of dvdend
on the essor s capta stock or the Interest on the essor s outstandng ndebted-
ness, together wth ta es, nsurance, or other f ed charges, such payments sha
be consdered renta payments and sha be returned by the essor corporaton as
ncome, notwthstandng the fact that the dvdends and nterest are pad by the
essee drecty to the sharehoders and bondhoders of the essor. The fact that a
corporaton has conveyed or et ts property and has parted wth ts management
and contro, or has ceased to engage n the busness for whch It was orgnay
organzed, w not reeve t from abty to the ta .
That ong standng reguaton1 s pany appcabe here. It covers varous
knds of conveyances and eases ncudng those where the grantor or essor has
parted wth a rghts of management and contro over the property. If vad, t
governs ths case whatever may be the ega ncdents of the 186 ndenture under
Inos aw. Its vadty seems cear. It s a permssbe defnton of one tem of
1 Ths reguaton dates from artce 80, Treasury Reguatons 33 (191 ed.). nd sea
artce 102. Treasury Reguatons 33 (1918 ed.). Provsons smar to those quoted In the
te t are contaned In artce 70, Treasury Reguatons 77, promugated under the Revenue
ct of 1932, and In artce 22(a)-20 of Treasury Reguatons 86, promugated under the
Revenue ct of 193 .
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23(a), rt. 23(a)- .
198
gross ncome under secton 22(a) of the Revenue ct of 1928 ( 5 Stat., 791, 797.)
Payments made drecty to sharehoders by the essee or transferee of corporate
property are propery recognzed as Income to the corporaton by reason of the
reatonshp of a corporaton to ts sharehoders. The fact that there s an antc-
patory arrangement whereby the ta payers s not even a condut of the payments
Is no more sgnfcant n ths type of case than t was n Lucas v. ar, supra.
The reatonshp between respondent and Its sharehoders ts an abdng one.
They obtan the dvdend payments because of the