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SECTION 201, ARTICLE 1549: Distribution from depletion or depreciation reserve.

(See 10–21-1497; sec. 214(a) 8, art. 169.) Treatment of depreciation as a deduction in corporate returns where practically all of the earnings have been distributed as dividends.

the earmas a deductiesec. 214(a)

SECTION 202.–BASIS FOR DETERMINING GAIN

OR LOSS.

SECTION 202, ARTICLE 1561: Basis for deter

1-21-1369 mining gain or loss from sale.

O. D. 762 (Also Section 213(b), Article 74.)

The M bank purchased certain 10-year 41 per cent municipal bonds at 96.10 which had been originally issued and sold by the municipality at 94.50. The question is presented as to whether in case the bank sells the bonds before maturity at 98, the profit realized will be exempt in its hands.

Held, that inasmuch as no person other than the municipality can pay the interest borne by the obligations of the municipality (whether such interest is paid at a specified rate or in the form of realized discount) any person selling municipal bonds for an amount in excess of the cost of the bonds to him realizes a taxable profit to the extent of such excess amount even though the bonds were issued at a discount.

If, therefore, the bank sells at $98 the municipal bonds issued at $94.50 and purchased by it at $96.10 it will derive a taxable profit of $1.90 on each bond sold. If, however, it holds the bonds to maturity and receives $100, the difference between the purchase price of the bonds and the amount received or $3.90 will represent exempt income to it.

SECTION 202, ARTICLE 1561: Basis for deter

3-21-1396 mining gain or loss from sale.

0. D. 774 The realized discount on a sale of municipal securities prior to maturity can not be treated as compensation "in lieu of interest” paid by a municipality, but is profit subject to tax. Only the holder of the note at maturity is entitled to treat the realized discount as income exempt from tax.

Profit derived from interest-bearing State or municipal securities, purchased at a discount and held until maturity, is not taxable where it clearly appears that such return from the investment in the hands of the taxpayer is due solely to the compensation received from the State or municipality, in lieu of additional interest for the use of the taxpayer's money. In no case may such exemption exceed the total discount at which the securities were originally sold by the State or municipality

SECTION 202, ARTICLE 1561: Basis for deter

5–21-1413 mining gain or loss from sale.

0. D. 782 A dealer in automobiles who takes used machines as part payment on sales of new cars is required to report the entire profits realized on the new cars for the year in which received regardless of the fact that part of the payments received are in the form of used machines. The fair market value of the used cars taken as part payment is deemed to be the value at which they were taken in on the sales.

In case the used cars are later sold, the basis for determining gain or loss will be the value placed on them for income tax purposes when received, or if inventories are employed and the cars were on hand at the beginning of the taxable year in which sold, the value at which they were included in the inventory at that date.

SECTION 202, ARTICLE 1561: Basis for deter

10–21-1492 mining gain or loss from sale.

A. R. R. 403 The Committee has had under consideration the appeal of A from the action of the Income Tax Unit in assessing additional taxes for 1917 on a profit derived from the sale of certain lands acquired in 1914 and using as a basis for computing such profit 1 dollars per acre.

It appears that in or about April, 1914, A acquired a large acreage of land located in Texas. These lands were acquired through the liquidation of the M Company of which A was the largest indi. vidual stockholder. The value fixed upon the lands at the time of liquidation and for the purpose of liquidation was approximately 10 dollars per acre. This value was not fixed, however, by appraisal or in any definite manner except for the convenience of the company. The lands in question may be divided into first and second class agricultural, first and second class grazing and broken and rocky, or waste.

The revenue agent in making the examination of the tax liability of A for 1917 used dollars per acre as the cost to A and computed a profit on the difference between this figure and the average selling price per acre in 1917. Using this computation a large profit is shown. The Income Tax Unit has accepted this method of computation and has assessed an additional tax against A for 1917.

It is contended by the attorney for the estate of A, that the arbitrary valuation of 1x dollars per acre fixed for the land in question as of the time of receipt through liquidation by his client, does not govern, but that in cases where there is a liquidation in kind the value of the thing received is to be used as the basis for computing profit upon subsequent sale thereof. In support of this contention the attorney for the taxpayer has submitted a number of affidavits showing that A always had priced this land at æ dollars per acre; that it is impossible to segregate the lands into classes for the reason that no accurate survey has been made, and for the further reason that these lands are located in five different counties and may be grouped in two separate ranches.

It is submitted in the case of the sale of a certain tract of land, say y acres, that the acreage of agricultural lands, grazing lands, and waste lands can not be definitely ascertained; that is, it is not possible to say that in this tract of y acres \y acres are agricultural, dy acres first-class grazing, ly acres second-class grazing, and ty acres sand hills and waste lands. This shows that it is impossible to so classify the lands in question, thereby ascertaining the total acreage by classes.

Evidence has been submitted showing that the valuation fixed by the revenue agent and accepted by the Unit in making the additional assessment for 1917 is in error. Maps have been submitted showing the location of the lands sold in various years and the prices received therefor. In 1912, 15y acres were sold at an average of a dollars per acre; in 1913, 85y acres were sold in a different location at an average of ix dollars per acre; in 1914, 5y acres were sold at an average of fx dollars, and in 1917, 2004 acres were sold at an average of 5x dollars per acre. It is contended that these averages show the property in question had a fair market value on March 1, 1913, in excess of the value fixed by the revenue agent in computing the profit. It is also submitted that these figures clearly indicate that the property in question had a value on the date of acquisition by A on April 30, 1914, in excess of the fæ dollars used by the revenue agent in computing the profit. The March 1 value is not pertinent for the purpose of this decision, for the reason that A acquired the lands in question after that date. It is necessary, however, to fix a value as of the time of acquisition for the purpose of computing the profit upon subsequent sale.

The evidence submitted clearly indicates that the trend of market conditions was generally upward with the exception of 1913. It appears that the fair valuation of the lands as of March 1, 1913, would be the average per acre for the total sales in 1912 and 1913, or approximately 6x dollars per acre, and that the lands had a fair valuation of 2.0 dollars per acre on April 30, 1914, the date on which A acquired such lands through the liquidation of the M Company.

The Income Tax Unit has held that foc dollars per acre is a fair valuation of the lands distributed to the stockholders of the corporation, since this value was fixed by the corporation for the purpose of liquidation. It was explained at the hearing in this case that the 1 dollars value was fixed as a matter of convenience for the purpose of satisfying the minority stockholders. A was not interested at that time in the value fixed for the purpose of liquidation, but was interested to see that the minority stockholders were satisfied.

The Committee agrees with the attorney for A in that the value fixed by the corporation for the purpose of liquidation does not govern, but that the actual value of the property received upon liquidation governs. While the method of determining value is not entirely accurate, it is the opinion of the Committee that a valuation of dollars per acre is both fair to the taxpayer and to the Gov. ernment, and that this valuation should be accepted as the basis for computing profit upon the subsequent sale of any part of the lands in question.

The Committee is also of the opinion that in so far as the lands in question are concerned, A did not make any profit upon the liquidation of the corporation, in 1914.

It appears that A and his wife acquired these lands located in the State of Texas and that during the years 1912, 1913, and 1914 certain boundaries were sold. It is submitted that all the land acquired in the State of Texas is “community property" under the laws of that State and that such land belonged in equal portions to A and his wife. None of this property, or the consideration with which it was purchased or acquired, belonged to or was the individual

61360°—21—3

property of either A or his wife separately at the time of their marriage. All of the property was acquired subsequent to their marriage and during their married life as the result of their joint effort and saving. They maintained their legal residence in the State of Texas. It is now submitted that A's wife never, at any time, parted with or waived her community interest in the property in question and that on the death of her husband she formally asserted her right to such“ community property” and the proceeds from the sale of a part thereof.

The attorney submits that under the foregoing conditions any profits derived from the sale of the lands in question in 1917 should be divided equally between A and his wife for the purpose of a return and the payment of tax. The Committee is of the opinion that this contention is sound and that they are entitled to the benefit of the provision of Treasury Decision 3071, dealing with “community property” of husband and wife in the State of Texas.

In view of the foregoing the Committee recommends (1) that fæ dollars per acre be accepted as the value of the lands in question received by A in liquidation of the M Company on April 30, 1914; (2) that the action of the Income Tax Unit fixing a value of 1x dollars per acre for the purpose of computing profit upon lands sold in 1917 be reversed; and (3) that the profit on the land sold in 1917 be computed on the basis outlined herein and that such profit be allocated equally to A and his wife for the purpose of a return and the payment of tax for that year.

SECTION 202, ARTICLE 1561: Basis for determin

16-21-1570 mg gain or loss from sale.

T. D. 3173

(Ct. D. 6) INCOME TAX-REVENUE ACTS OF 1916 AND 1917-DECISION OF COURT.

1. INCOME—ESTATES OF DECEDENTS-DIRECTIONS OF TESTATOR AS TO APPRECIA

TION REALIZED BY SALE.

A testator creating a trust can not render appreciation of the trust estate after his death, realized by sale, nontaxable by a provision in his will that " accretions of selling value shall be considered principal and not income"; such provision in a will may be disregarded.

2. TAXABLE PERSONS—TRUSTEES—ESTATES OF DECEDENTS. Trustees are taxable persons within the plainly expressed purpose of the Act.

3. INCOME-DEFINITION—CORPORATION EXCISE TAX AND INCOME TAX ACTS

APPRECIATION OF CAPITAL ASSETS REALIZED BY SALE.

The term “income ” has the same meaning in all of the Income Tax Acts that was given to it in the Corporation Excise Tax Act of 1909, and includes profit gained through sale or conversion of capital assets.

4. INCOME-PROFITS REALIZED BY ISOLATED SALES

Income includes gains realized by a single isolated sale of capital assets as well as from sales by one engaged in buying and selling as a business. "

5 INCOME-EFFECT OF STATE LAW REGARDING LIFE TENANTS AND REMAINDERMEN.

Where a trustee of life estate with remainder over sells capital assets of the estate acquired prior to March 1, 1913, for an amount in excess of the value of such assets on March 1, 1913, which value was greate than cost, the difference between selling price and value on that date is, for the purpose of taxation, to be treated as if the trustee were the sole owner, notwithstanding that under State law the entire proceeds of the sale are required to be added to the corpus of the estate and held for the remainderman and the profits of such sale do not go to the life tenant.

TREASURY DEPARTMENT,
OFFICE OF COMMISSIONER OF INTERNAL REVENUE,

Washington, D. C. To collectors of internal revenue and others concerned:

The appended decision of the Supreme Court of the United States, dated March 28, 1921, in the case of Merchants' Loan & Trust Company, as trustee of the estate of Arthur Ryerson, deceased, plaintiff in error, v. Julius F. Smietanka, formerly United States collector of Internal Revenue for the First District of the State of Ninois, is published for the information of internal revenue officers and other concerned.

D. H. BLAIR,

Commissioner of Internal Revenue. Approved June 4, 1921 : A. W. MELLON,

Secretary of the T'reasury.

SUPREME COURT OF THE UNITED STATES. No. 608. OCTOBER TERM, 1920.

Merchants' Loan & Trust Co., as trustee of the estate of Arthur Ryerson, de

ceased, plaintiff in error, v. Julius F. Smietanka, formerly United States Collector of Internal Revenue for the First District of the State of Illinois. Error to the District Court of the United States for the Northern District of Minois.

[March 28, 1921.]

Mr. Justice CLARKE delivered the opinion of the court:

A writ of error brings this case here for review of a judgment of the District Court of the United States for the Northern District of Illinois, sustaining a demurrer to a declaration in assumpsit to recover an assessment of taxes for the year 1917, made under warrant of the income tax Act of Congress, approved September 8, 1916 (39 Stat., ch. 463, p. 756), as amended by the Act, approved October 3, 1917 (40 Stat., ch. 63, p. 300). Payment was made under protest and the claim to recover is based upon the contention that the fund taxed was not " income" within the scope of the sixteenth amendment to the Constitution of the United States and that the effect given by the lower court to the Act of Congress cited renders it unconstitutional and void. This is sufficient to sustain the writ of error. Torone v. Eisner, 245 U. S. 418.

Arthur Ryerson died in 1912, and the plaintiff in error is trustee under his wil, of property the net income of which was directed to be paid to his widow during her life and after her death to be used for the benefit of his children, or their representatives, until each child should arrive at twenty-five years of age, when each should receive his or her share of the trust fund.

The trustee was given the fullest possible dominion over the trust estate. It was made the final judge as to what “ net income ” of the estate should be, and its determination in this respect was made binding upon all parties interested therein, “except that it is my will that stock dividends and accretions of selling values shall be considered principal and not income."

The widow and four children were living in 1917.

Among the assets which came to the custody of the trustee were 9,522 shares of the capital stock of Joseph T. Ryerson & Son, a corporation. It is a verred that the cash value of these shares, on March 1, 1913, was $561,798, and that they were sold for $1,280,996.64, on February 2, 1917. The Commissioner of

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