SECTION 213(a), ARTICLE 32: Compensation for personal services. 37-21-1814 O. D. 1029 A was an employee of the M Company under contract for a period of 21 years, such contract being terminable at the will of the company. The company sold its assets and discontinued business during 1920, and at the time A's employment ceased in 1921 he received by dollars from the M Company as an expression of its appreciation of his long and faithful service. A had no interest in the company, received nothing in the way of bonuses or extra commission, and had no agreement with the company for anything further than his salary. This office has held that pensions and bonuses are in the nature of additional compensation to the recipient and must be included in computing net income. In a like manner, any lump sum received by an employee from a former employer upon the termination of his employment has in it a large element of compensation for services previously rendered. It is held, therefore, that the amount received by A is in the nature of additional compensation and must be included by A in computing his net income for the year in which it was received. SECTION 213 (a), ARTICLE 32: Compensation for personal services. (See 52-21-1989; sec. 1, art. 1507.) Contributions to joint adventure used in maintenance of taxpayer's home. SECTION 213(a), ARTICLE 33: Compensation paid other than in cash. 46-21-1917 O. D. 1098 The regulations of the Public Health Service provide that officers of such service are entitled to quarters, heat, and light, and that employees, such as attendants, dietitians, internes, nurses, and reconstruction aids, are entitled to quarters, subsistence, and laundry. These items are furnished to such persons in respect of a service which they render and as an inducement to them to enter the Public Health Service. It is held, therefore, that the value of the quarters, subsistence, laundry, heat, and light furnished the officers and employees referred to constitutes income to such officers and employees and must be returned by them as income for the year in which received. SECTION 213 (a), ARTICLE 35: Gross income from business (Also Section 214(a)7, Article 151.) 30-21-1742 O. D. 979 It is suggested by a taxpayer that Regulations 45 be changed so as to permit all taxpayers to compute their net income under the Revenue Act of 1918 by valuing their notes receivable at their fair market value in any case in which the time for the payment of such notes has been extended by the taxpayer and the notes can not be discounted or sold without material loss. In accordance with the suggested procedure in such cases a merchant who had notes re ceivable for goods sold and who granted the purchaser an extension of time within which to pay the notes would be permitted to treat the fair market value of the notes as the price for which the goods were sold or to deduct from gross income as a loss the difference between the face value of the notes and their fair market value at the time they originally became due. This matter has been carefully considered and the conclusion reached that it is not within the authority of this office to modify the regulations as suggested. * * * The provision of article 34 of Regulations 45, relating to promissory notes received in payment for services rendered, is not applicable in determining the gross profit derived by a taxpayer engaged in a business involving the purchase and sale of merchandise. The provision of article 34 referred to is based on that part of section 213 (a) which provides that "the term 'gross income' includes * * compensation for personal service of whatever kind and in whatever form paid, There is nothing in the statute modifying what must otherwise be accepted as the guiding principle in determining gross income in the case of a manufacturing, merchandising, or mining business. Under the statute, therefore, gross income in such a case must be determined according to the accepted principles of accounting. (See sections 212 and 232 of the statute and articles 21 and 35 of Regulations 45.) It is an accepted accounting principle that gross profit from sales is determined by subtracting from the gross contract price the cost of the goods sold. If the obligation of the purchaser to pay the gross contract price subsequently becomes worthless and uncollectible, the procedure is to charge off the obligation as a bad debt. This principle is recognized in sections 214(a)7 and 234(a)5 of the statute, which provide that in computing net income there shall be allowed as a deduction "debts ascertained to be worthless and charged off within the taxable year." Under these provisions of the statute a deduction for bad debts can be made only for the year in which the debts are determined worthless and charged off, and an account merely written down can not be deducted. The effect of the proposed change in the regulations would be to allow taxpayers to take a deduction for bad debts prior to the year in which they were determined worthless and charged off, which would be contrary to the plain wording of the statute. SECTION 213(a), ARTICLE 35: Gross income from business. (Also Section 215, Article 291.) 34-21-1777 O. D. 998 A taxpayer engaged as a sole proprietor in the business of selling provisions kept no books of account and ascertained his purchases by means of bank checks issued and his sales by reference to his bank deposits. Inventories were taken at the end of the year. In making a report of his income for the taxable year he failed to consider the groceries and meats taken for personal and family consumption. Held, that he must subtract from his total purchases for the year or add to his total sales for the year the cost of provisions withdrawn for personal or family use. SECTION 213 (a), ARTICLE 36: Long-term contracts. 52-21-1991 O. D. 1147 A taxpayer reporting income on the completed contract basis, who keeps his books of account on an accrual basis, and who upon completion of the contract which extended over a term of years receives a part of the payment called for therein, the balance being represented by an account receivable, should return the full amount of the contract price as income for the year in which the contract was completed. SECTION 213(a), ARTICLE 39: Sale of stock and rights. 33-21-1767 T. D. 3206 INCOME TAX-SALES- LOSSES SHRINKAGE, ETC. TREASURY DEPARTMENT, OFFICE OF COMMISSIONER OF INTERNAL REVENUE, To collectors of internal revenue and others concerned: are as follows: ART. 39. Sale of stock and rights.—When shares of stock in a corporation are sold from lots purchased at different dates and at different prices and the identity of the lots can not be determined the stock sold shall be charged against the earliest purchases of such stock. The excess of the amount realized on the sale over the cost of the stock will constitute gain. However, the gain which is taxable in the case where the stock was acquired before March 1, 1913, when its fair market value as of that date is in excess of its cost, is the excess of the amount realized by the sale over such value. No gain is recognized when stock is sold at more than its cost but at less than its fair market value as of March 1, 1913. In the case of stock in respect of which any stock dividend was paid, the cost of each share of such stock shall be ascertained as specified in article 1547. Where common stock is received as a bonus with the purchase of preferred stock or bonds, the total purchase price shall be fairly apportioned between such common stock and the securities purchased for the purpose of determining the portion of the cost attributable to each class of stock or securities, but if that should be impracticable in any case, no profit on any subsequent sale of any part of the stock or securities will be realized until out of the proceeds of sales shall have been recovered the total cost. See article 1565 as amended. The entire amount realized from the sale of rights to subscribe for stock is income. SECTION 213(a), ARTICLE 40: Sale of patents and copyrights. 33-21-1767 T. D. 3206 of Regulations 45 (1920 edition) ART. 40. Sale of patents and copyrights.—A taxpayer disposing of patents or copyrights by sale should determine the profit or loss arising therefrom by computing the difference between the selling price and the cost. The taxable income in the case of patents or copyrights acquired prior to March 1, 1913, should be ascertained in accordance with the provisions of article 1561 as amended. The profit or loss thus ascertained should be increased or decreased, as the case may be, by the amounts deducted on account of depreciation of such patents or copyrights since February 28, 1913, or since the date of acquisition if subsequent thereto. See article 167. SECTION 213 (a), ARTICLE 41: Sale of good will. 33-21-1767 T. D. 3206 of Regulations 45 (1920 edition) ART. 41. Sale of good will.-Any profit or loss resulting from a sale of good will can be taken only when the business, or a part of it, to which the good will attaches is sold, in which case the profit or loss will be determined upon the basis of the cost of the assets, including good will. If the good will was acquired prior to March 1, 1913, the taxable gain or deductible loss should be ascertained in accordance with the provisions of article 1561 as amended. If nothing was paid for good will acquired after February 28, 1913, no deductible loss with respect thereto is possible, although, on the other hand, upon the sale of the business there may be a profit. It is immaterial that good will may never have been carried on the books as an asset, but the burden of proof is on the taxpayer to establish the cost or fair market value on March 1, 1913, of the good will sold. See article 163. SECTION 213(a), ARTICLE 42: Sale of personal property on installment plan. 39-21-1838 O. D. 1045 Where a taxpayer has received permission to report the profits on installment sales as having been realized as at the date of collection of outstanding accounts, may such taxpayer apply all cash payments on customers' accounts which showed a balance due as of January 1, 1920 (the sales causing such balances having been previously reported as income in 1919), until the old accounts are fully paid, and then apply subsequent receipts on additional sales to such customers; or, is it necessary to divide each installment payment, applying part to the old account and part to the new account, taking for the old account a sum equal to previous installment payments thereon? Inasmuch as installment sales generally are made under an agreement in accordance with which the purchaser is obliged to make payments of stated amounts periodically, it is held that in each case the payment made by the purchaser on his various accounts in carrying out the terms of agreement into which he has entered should be allocated to the particular account to which under the terms of the contract of sale such payment is to be applied. However, in cases of continuous accounts, the cash payments may be allocated, in accordance with the generally recognized principle of law governing such cases, to the earliest items of the account, in the absence of other application thereof being directed by the vendee. SECTION 213(a), ARTICLE 42: Sale of personal property on the installment plan. 47-21-1930 O. D. 1107 The taxpayer is engaged in the sale of personal property and desires to adopt a system of accounting to meet with the requirements for reporting the profit from installment sales, in accordance with the provisions of article 42 of Regulations 45. It appears that in addition to installment sales, this company also makes charge and cash sales. The accounts enumerated by O. D. 792 (C. B. 4, p. 86), are summary entries made at the close of the accounting period from the pro forma accounts which have been regularly kept during such period. In the case of a combination of cash, charge, and installment sales, the cost of the goods sold is obtained in the usual manner which is the sum of the opening inventory and purchases for the year less the closing inventory. The percentage of gross profit on sales for the year is the percentage which the gross profit from all sales is of the total sales for the year, regardless of whether cash, charge, or installment sales. The percentage of gross profit for a particular year applied to the total collections for that year gives the gross income from sales for such year. This percentage remains the same for collections on installment sales contracts for a particular year regardless of whether such collections are made in the year in which the sale was made or in a later year. Collections made in subsequent years on prior installment sales contracts must, of course, be allocated and credited to the year in which the sale was made. In addition to the special accounts enumerated by O. D. 623 (C. B. 3, p. 105) and O. D. 792, supra, the other accounts which would normally be maintained are the same as those of an ordinary business adapted if necessary to furnish the information desired at the close of the accounting period. SECTION 213(a), ARTICLE 43: Sale of real estate in lots. Articles * * * 43 are hereby amended * * 33-21-1767 T. D. 3206 * of Regulations 45 (1920 edition) ART. 43. Sale of real estate in lots.-Where a tract of land is purchased with a view to dividing it into lots or parcels of ground to be sold as such, the cost shall be equitably apportioned to the several lots or parcels and made a matter of record on the books of the taxpayer, to the end that any gain derived from the sale of any such lots or parcels which constitutes taxable income may be returned as income for the year in which the sale was made. This rule contemplates that there will be a measure of gain or loss on every lot or parcel sold, and not that the capital invested in the entire tract shall be extinguished before any taxable income shall be returned. The sale of each lot or parcel will be treated as a separate transaction and the gain or loss will be accounted for as provided in article 1561 as amended. SECTION 213(a), ARTICLE 43: Sale of real estate in lots. 43-21-1881 O. D. 1072 A purchased real estate in 1916 with the view of reselling same as a whole. In 1917 he sold to a railroad company a perpetual ease |