pany, of the then value of $291,600. It is averred and admitted that on March 1, 1913. the value of this stock was $148.635.50, and that it was sold in 1916 for $269,346.25. Although it is thus apparent that the stock involved was of less value on March 1, 1913, than when it was acquired, and that it was ultimately sold at a loss to the owner, nevertheless the collector assessed the tax on the difference between the value on March 1, 1913, and the amount for which it was sold.

The plaintiff in error seeks to recover the whole of these two assessments. The same contention is made with respect to each of these payments as was made in No. 608, The Merchants Loan & Trust Company, as trustee, v. Julius F.Smietanka, Collector of Internal Revenue, this day decided, viz, that the amounts realized from the sales of the stocks were in their inherent nature capital as distinguished from income, being an increment in value of the securities while owned and held as an investment and therefore not taxable under the Revenue Act of 1916 (39 Stat. 756) as amended in 1917 (40 Stat. 300) or under any constitutional law.

With respect to the first payment. It is plain that this assessment was on the profit accruing after March 1, 1913, the effective date of the Act, realized to the owner by the sale after deducting his capital investment. The question involved is ruled by No. 608, supra, and the amount was properly taxed.

As to the second payment. The Government confesses error in the judgment with respect to this assessment. The stock was sold in the year for which the tax was assessed for $22,253.75 less than its value when it was acquired, but for $120,710.75 more than its value on March 1, 1913, and the tax was assessed on the latter amount.

*

** *

The Act under which the assessment was made provides that the net income of a taxable person shall include gains, profits and income derived from sales or dealings in property, whether real or personal gains or profits and income derived from any source whatever. (39 Stat. 757; 40 Stat. 300, 307.)

or

Section 2(c) of this same Act provides that " for the purpose of ascertaining the gain derived from a sale or other disposition of property, real, personal or mixed, acquired before March 1, 1913, the fair market price or value of such property as of March 1, 1913, shall be the basis for determining the amount of such gain derived."

And the definition of “income" approved by this court is:

"A gain derived from capital, from labor, or from both combined, provided it be understood to include profits gained through sale or conversion of capital assets." Eisner v. Macomber, 252 U. S. 189, 207.

It is thus very plain that the statute imposes the income tax on the proceeds of the sale of personal property to the extent only that gains are derived therefrom by the vendor, and we therefore agree with the Solicitor General that since no gain was realized on this investment by the plaintiff in error no tax should have been assessed against him.

Section 2(c) is applicable only where a gain over the original capital investment has been realized after March 1, 1913, from a sale or other disposition of property.

It results that the judgment of the district court as to the first assessment, as we have described it, is affirmed, that as to the second assessment it is reversed, and the case is remanded to that court for further proceedings in conformity with this opinion.

Reversed in part. Affirmed in part.

Mr. Justice HOLMES and Mr. Justice BRANDEIS, because of prior decisions of the court, concur only in the judgment.

SECTION 202, ARTICLE 1561: Basis for determining gain or loss from sale.

16-21-1573 T. D. 3176 (Ct. D. 9)

INCOME TAX-REVENUE ACT OF 1916-DECISION OF COURT.

1. INCOME-GAIN FROM SALE OF CAPITAL ASSETS-APPRECIATION SINCE MARCH 1, 1913, OVER COST.

Where a taxpayer sells property, acquired prior to March 1, 1913, for an amount in excess of its value on that date and also in excess of its cost, such

value being less than its cost, only that part of the selling price which is above cost is gain, and subject to taxation as income.

2. INCOME-GAIN FROM SALE OF CAPITAL ASSETS-APPRECIATION SINCE MARCH 1, 1913.

Where a taxpayer sells property acquired prior to March 1, 1913, for an amount in excess of its value March 1, 1913, but equal to its cost, he receives no profit, hence no income subject to taxation.

3. INCOME GAIN FROM SALE OF CAPITAL ASSETS-COST OF PROPERTY.

Where a taxpayer bought bonds in 1902 and 1903, at a price in excess of their value March 1, 1913, through an underwriting agreement such that he did not receive any interest upon the amount paid prior to the allotment to him of the bonds in 1906, he is not permitted to add interest on the investment for the time which so elapsed, as a part of the cost to him of the bonds, in determining his gain subject to taxation as income.

4. INCOME STOCK DIVIDENDS.

Stock dividends are not income subject to taxation.

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 James J. Walsh, Collector of Internal Revenue, plaintiff in error, v. Frederick F. Brewster, is published for the information of internal revenue officers and others concerned.

Approved June 4, 1921:

A. W. MELLON,

D. H. BLAIR, Commissioner of Internal Revenue.

Secretary of the Treasury.

SUPREME COURT OF THE UNITED STATES. No. 742. OCTOBER TERM, 1920.

James J. Walsh, Collector of Internal Revenue, plaintiff in error v. Frederick F.

Brewster.

Error to the District Court of the United States for the District of Connecticut.

[March 28, 1921.]

Mr. Justice CLARKE delivered the opinion of the court :

In this case the defendant in error sued the plaintiff in error, a collector of internal revenue, to recover income taxes for the year 1916, assessed in 1918, and which were paid under protest to avoid penalties. The defendant answered, the case was tried upon an agreed statement of facts, and judgment was rendered in favor of the taxpayer, the defendant in error. The case is properly here by writ of error. Towne v. Eisner, 245 U. S. 418.

The defendant in error was not a trader or dealer in stocks or bonds, but occasionally purchased and sold one or the other for the purpose of changing his investments.

Three transactions are involved.

The first relates to bonds of the International Navigation Company, purchased in 1909, for $191,000 and sold in 1916 for the same amount. The market value of these bonds on March 1, 1913, was $151,845, and the tax in dispute was assessed on the difference between this amount and the amount for which they were sold in 1916, viz, $39,155.

The trial court held that this apparent gain was capital assets and not taxable income under the sixteenth amendment to the Constitution of the United States, and rendered judgment in favor of the defendant in error for the amount of the tax which he had paid.

The ground upon which this part of the judgment was justified below is held to be erroneous in No. 608, Merchants Loan and Trust Company, as Trustee v. Julius F. Smietanka, Collector of Internal Revenue, this day decided, but, since the owner of the stock did not realize any gain on his original investment by the sale in 1916, the judgment was right in this respect, and under authority of the opinion and judgment in No. 663, Goodrich v. Edwards, Collector, also rendered this day, this part of the judgment is affirmed.

The second transaction involved the purchase in 1902 and 1903 of bonds of the International Mercantile Marine Company for $231,300, which were sold in 1916 for $276,150. This purchase was made through an underwriting agreement such that the purchaser did not receive any interest upon the amount paid prior to the allotment to him of the bonds in 1906, and he claimed that interest upon the investment for the time which so elapsed should be added as a part of the cost to him of the bonds. But this claim was properly rejected by the trial court under authority of Hays v. Gauley Mountain Coal Company, 247 U. S. 189.

It is stipulated that the market value of these bonds on March 1, 1913, was $164,480, and the collector assessed the tax upon the difference between the selling price and this amount, but since the gain to the taxpayer was only the difference between his investment of $231,300 and the amount realized by the sale, $276,150, under authority of No. 663, Goodrich v. Edwards, Collector, this day decided, he was taxable only on $44,850.

The district court, however, held that any gain realized by the sale was a mere conversion of capital assets and was not income which could lawfully be taxed. In this respect the court fell into error. The tax was properly assessed, but only upon the difference between the purchase and selling price of the bonds as stated.

The third transaction related to stock in the Standard Oil Company of California, received through the same stock dividend involved in Eisner v. Macomber, 252 U. S. 189. The district court, upon authority of that case, properly held that the assessment made and collected upon this dividend should be refunded to the defendant in error.

It results that as to the profit realized upon the second transaction, as indicated in this opinion, the judgment of the district court is reversed, but as to the other transactions it is affirmed for the reasons and upon the grounds herein stated.

Judgment reversed in part, affirmed in part, and case remanded.

Mr. Justice HOLMES and Mr. Justice BRANDEIS, because of prior decisions of the court, concur only in the judgment.

SECTION 202, ARTICLE 1561: Basis for deter

mining gain or loss from sale.

(Also Section 213 (a), Article 49.)

18-21-1604 O. D. 897

Requisition of property by the Government in 1917 for war uses and payment therefor of a price named by the Commission of the War Department is considered a sale or other disposition of property as referred to in section 2 (c) of the Revenue Act of 1916 which section was not amended by the Revenue Act of 1917.

In such a case the taxpayer may make application for the establishment of a replacement fund as authorized by Treasury Decision 2706, and articles 49 and 50 of Regulations 45.

SECTION 202, ARTICLE 1561: Basis for determining gain or loss from sale.

(Also Section 213(a), Article 41; Section 214(a)8, Article 163.

23-21-1669

O. D. 937

In applying the third method outlined in A. R. M. 34 (C. B. 2,

p. 31), of determining value as of March 1, 1913, of intangible assets, individuals or partnerships in determining net earnings should deduct a reasonable amount on account of the salaries of owners actively engaged in the business.

SECTION 202, ARTICLE 1561: Basis for determining gain or loss from sale.

24-21-1682

O. D. 945

A taxpayer purchased land from his mother, the consideration being a certain amount in cash and his promise to support her for life. In further consideration he took out a life insurance policy, payable to his mother if he should predecease her, and it is assumed payable to his estate or a beneficiary designated by him in the event that he survives her. He sold this land for a stipulated amount. The question presented is what basis should be used in determining gain or loss resulting from the sale, the suggestion being made that such basis may be determined by ascertaining from life tables the expectancy of life of the mother and multiplying the number of years in such expectancy of life by the cost of a year's maintenance, the amount so obtained to be added to the amount of the cash payment made.

Held, that the plan outlined establishes in part the cost, and that since the son was obligated to take out an insurance policy on his life for the purpose of securing the maintenance of his mother in case of his death, during her life, he is entitled to consider as the remainder of the cost of the land the premiums paid or to be paid by him upon such policy during the life expectancy of his mother.

SECTION 202, ARTICLE 1561: Basis for determining gain or loss from sale.

(Also Section 201, Article 1548.)

26-21-1699

O. D. 955

Where a corporation was organized subsequent to February 28, 1913, the basis for determining the gain or loss from the sale of real estate acquired by the corporation in exchange for its stock is the cost of the real estate to the corporation. The cost price of the property to the corporation is the market value, on the date of the exchange, of the stock exchanged therefor. The difference between the amount received by the corporation upon the sale of the real estate and this cost price, proper adjustments being made for depreciation and for amounts expended by the corporation for permanent improvements, is taxable income or a deductible loss, as the case may be. If the stock had no established market value at the time of the exchange, the actual intrinsic value of the assets of the company at that time should be determined and the liabilities deducted. The resulting net worth represents the total value of the outstanding stock. The value of each share may be found by dividing such net worth by the total number of shares outstanding. Treasury stock for this purpose is not to be considered as outstanding. In determining net worth for the purpose of fixing the fair market value of the stock at the time of the exchange, the property given in for such stock should

be included in the assets at its fair market value at the time when exchanged for the stock. What the fair market value of the property was at that time is a question of fact to be established by any appropriate evidence which is available. Among other things there may be submitted as evidence of such value the sales price of like property in sales occurring in the same locality at that time and an appraisal made by a disinterested person familiar with real-estate values in the locality and with conditions affecting such values at that time.

Each and every distribution made by the corporation to its stockholders during the taxable year will be deemed to have been made from earnings or profits of the corporation to the extent that the corporation had such earnings and profits on hand at the time the distribution was made. Any distribution in excess of the earnings and profits of the corporation on hand at the date of distribution represents a return of capital to the stockholders, and if such return of capital added to any amounts of capital previously returned to the stockholders does not equal the cost to them of their stock it will not be subject to either the normal tax or surtax in their hands. If at the time of any distribution the stockholders had received a return of capital in an amount equal to the cost of their stock, the entire amount distributed to them in excess of the earnings and profits of the corporation on hand at the date of distribution represents taxable income to them subject to both normal tax and surtax at the rates for the taxable year. In case of the subsequent liquidation of the corporation or the sale by the stockholders of their stock upon which they have had any return of capital, the amount so returned to them must be added to the amount received in liquidation or to the selling price, as the case may be, for the purpose of determining the gain or loss arising to them from the transaction.

SECTION 202, ARTICLE 1562: Sale of property acquired by gift or bequest.

12-21-1516

O. D. 847

A taxpayer inherited an undivided interest in a piece of property. He sold his interest to his sisters for an amount less than the value at which it was appraised for inheritance tax. The sale price was approximately one-third less than the price which it is estimated that the property would have brought at a forced sale.

The difference between the fair market value of the property at the date of acquisition and the selling price (with proper adjustments for depreciation and improvements) does not, under the facts in the case, represent a loss properly deductible from gross income, but is rather in the nature of a gift to his sisters.

SECTION 202, ARTICLE 1563: Exchange of prop

erty.

5-21-1414

O. D. 783

The provisions of section 202(b) of the Revenue Act of 1918, relating to reorganizations, consolidations, and mergers, are new. These provisions are not contained in any of the prior income tax Acts and they are not declaratory of the rule existing under the previous Acts. They apply to the determination of gain or loss from