closing transaction, and in each case there will be no realization of income until the closing transaction has occurred. In each case the spirit of the law and the clear ruling of the Supreme Court show that no part of the amount realized except that part which is attributable to the period after March 1, 1913, is to be regarded as taxable gains.

The book value of the venture on March 1, 1913, does not determine; the only question is, "did the income accrue from conditions existing before or after March 1, 1913; if before, the income is not taxable." In this case the conditions arose before and not after.

The fact that on March 1, 1913, the taxpayer's books showed a debt of $1,000 due to the bondholder is not significant. The same was true in the case of the land transaction; at March 1, 1913, the book value of the land still stood at cost; yet wholly aside from the books-the court held that if the market value on that date showed that the transaction if closed out would have shown a profit, that profit, when finally realized is nontaxable. Note that what governs is not the book value on March 1, 1913; the thing that governs is something that is not on the books at all-the market value at that time; and the only reason that is important is that we are trying to find whether the conditions which caused the profit existed before or after March 1, 1913.

Under

Therefore, the mere fact that on March 1, 1913, this indebtedness had not been marked down on the books from $1,000 to $800 is immaterial. the Supreme Court view, the books do not govern.

If the Department in the transaction here involved, which began in 18-and ended in 1918, should insist on utterly disregarding what would have happened if the transaction had been liquidated in March 1, 1913, under the conditions, it would be the only case in the whole field of the income tax, in which such a course has been pursued, in every other case, the facts with reference to theoretical liquidation and liquidation as of March 1, 1913, having been religiously observed. To tax this taxpayer would be to put behind the Department the whole body of its previous precedents, and especially the theory on which they are based.

The taxpayer's contention is apparently based upon the theory and supporting arguments that full recognition must first be given to values at March 1, 1913, in deciding whether a taxable gain or income is derived from any transaction whatsoever which had a beginning prior to and an ending subsequent to that date, and that any realization of gain or profit arising from such transaction which represents an increase in value which existed and was determinable on March 1, 1913, must be exempted from taxation; further, that this is true, so far as concerns the taxability of gains or profit, whether the transaction be one involving the purchase (or other manner of acquirement) of assets and the subsequent sale thereof, or one, as in the instant case, where a taxpayer sells its own obligations, and subsequently purchases such obligations and retires them.

It is observed that the taxpayer's attorneys have selected certain language from the several Supreme Court decisions which they have cited in support of their contentions. It is evident that they have considered this language as stating a legal principle of general application to all questions involving the taxability of gains or profits arising from transactions of any description wherein the transaction began prior to and ended subsequent to the effective dates of the Excise and Income Tax Acts (January 1, 1909, and March 1, 1913).

The attorneys' view in this respect appears to be clearly set forth in that portion of the brief reading:

It is true that most of the cases decided relate to transactions which began with the purchase of property and were closed by selling the property. But the introduction of the 1913 principle into these cases was not arbitrary. It was based on a principle. That principle was that any income which had already accrued to the taxpayer before March 1, 1913, whether realized or not, is exempt from taxation. There is no reason for limiting this general principle, fully recognized by the Supreme Court, to any particular kind of property or any particular kind of transaction in which income is realized. There is no sund basis on which you can say that this principle applies to income from purchase and sale transaction and not to income derived from other transactions. If it is a sound principle, it applies to any kind of income, and the Supreme Court has taken care not to limit it to purchase and sale transactions as is shown by the following quotation from the case of Southern Pacific Company v. Lowe. (T. D. 2730.)

The Committee is of the opinion that in so doing they have erred, and that such language should be considered as applying only to questions and transactions similar to those which were the subject of litigation in those particular cases. It should be noted that in each of the cases cited there was considered the question of taxable gain or profit arising from transactions involving a purchase or investment prior to and a realization of profit or gain from such purchase or investment subsequent to the effective dates of the taxing Acts, and that in each of such cases it was held that dividends received subsequent to the effective date of the Act under which they were sought to be taxed were to be exempted from tax to the extent that they represented a realization of gains, profits, or income from earnings or increased values which existed on such effective dates.

It should also be noted in each of the cases cited that the thing giving rise to the gain or profit was an asset of the taxpayer, and in the opinion of the Committee the principle upon which the taxpayer has relied applies only to such cases wherein the gains or profits under consideration arise from the ownership of assets such as property of all descriptions, property rights, rights in property, etc.

In the instant case, it certainly can not be stated that the gain or profit accrued to the taxpayer through a transaction wherein the thing upon which such gain or profit was realized constituted an asset of the taxpayer. To the contrary, the thing upon which the gain or profit was realized was an obligation which created a liability and resulting charge against the assets of the taxpayer.

In accordance with the foregoing comments, the Committee is unable to sustain the contention of the taxpayer that the principle enunciated in the aforementioned Supreme Court decisions is applicable in determining the amount of taxable gain or profit arising from any and all transactions which began before and ended after March 1, 1913, or that it is applicable to the instant case where by the provisions of article 544, Regulations 45, it is held that a taxable gain is realized by the purchase and retirement of the taxpayer's obligations.

Careful thought has been given to the taxpayer's statement:

This taxpayer got the extra dollars when he started the transaction. He got nothing at all in the later year and it might well be argued that in deciding what income was received by the taxpayer in the year when he made his last bargain, the Government can not say that he has received income merely because he got some money several years before that he will now not have to pay back.

At a hearing held before the Committee on March 7, 1920, the attorneys supported this argument by referring to T. D. 3062 (article 48 of Regulations 45), which in substance holds that the value of improvements determined according to the method outlined by the decision, at the time of erection and completion by a lessee on leased property, constitutes income to the lessor at the time of such erection. and completion provided that under the terms of the leasehold, such improvements become the property of the lessor.

In answer to this argument, it may be stated in the opinion of the Committee that in transactions contemplated by T. D. 3062, the lessor receives income in an amount equal to the determinable market (or money) value of an asset at the time of acquirement, the title to which vests in such lessor under the leasehold agreement. The Committee fails to see any analogy between such transactions as are contemplated by T. D. 3062 and the one under consideration in the instant case. Surely it can not be said that the taxpayer in 18-, by borrowing money on its own obligations, to the extent of the face value of such obligations, acquired an asset of determinable value, thereby realizing income at that time.

Careful study of this case and of the views and arguments of the attorneys fails to reveal to the Committee that the taxpayer's own obligations in the form of corporate bonds are susceptible of such valuation at March 1, 1913, as is contemplated by the law and regulations and Supreme Court decisions for the purpose of establishing gain, profits, or income arising from the sale, exchange, or ownership of property; therefore, it is recommended in the appeal of the M Company that the action of the Unit in assessing an additional tax for 1918, resulting from the addition to the company's gross income for that year of the excess of the par or face value of the company's bonds over the price paid upon purchase and retirement of the bonds, be sustained.

ART. 545. Sale of capital assets. Where property is acquired and later sold for a higher price, the gain on the sale is income. If, however, the property was acquired before March 1, 1913, only such portion of the gain as accrued subsequently to February 28, 1913, is taxable. Where, then, a corporation sells its capital assets in whole or in part, it shall include in its gross income for the year in which the sale was made the amount of the excess of the sales price over the cost unless it acquired such assets prior to March 1, 1913, and the fair market value of such assets as of such date was in excess of the cost, in which case it shall include the excess of the amount of the sales price over such value. No gain or loss is recognized in case the assets are sold (a) at more than cost, but at less than their fair market value as of March 1, 1913, or (b) at less than cost, but at more than their fair market value as of March 1, 1913. In every case, however, in ascertaining the gain, the cost of the assets, or the fair market value as of March 1, 1913, of the assets acquired prior thereto, should first be reduced by the amount of any charges for depreciation, depletion, and other deductions which have been or should have been taken. If the purchaser takes over all the assets and assumes the liabilities, the amount so assumed is part of the purchase price. See also article 563, as amended. If the sale is made for stock of another corporation, the rules contained in section 202 of the statute and in articles 1561-1570 as amended are particularly applicable.

SECTION 233, ARTICLE 549: Exclusions from gross

income.

33-21-1770

O. D. 994

The question has been presented as to whether life insurance companies, in view of the provisions of Treasury Decision 3153 (C. B. 4, p. 280), may now deduct from gross income dividends applied to purchase additional paid-up insurance in those cases where premiums equal to or greater than the dividends are received from the policyholder within the taxable year.

Treasury Decision 3153 does not provide for a deduction from gross income of dividends applied to purchase additional paid-up insurance. It is stipulated therein that a life insurance company shall not include in gross income such portion of any actual premium received from any individual policyholder as is paid back or credited to such policyholder within the taxable year.

Held, that it is proper for a life insurance company to exclude from gross income of the current year so much of the premiums paid during that year as does not exceed dividends applied by policyholders during the year to purchase additional paid-up insurance.

SECTION 233, ARTICLE 550: Gross income of

foreign corporations.

36-21-1806 O. D. 1024

The M Company, a foreign corporation, acts as agent for certain steamship companies. During the winter months the steamship companies transfer their fleet of vessels from a foreign port to a United States port, as a matter of convenience, but not necessarily a matter of unavoidable arrangement. The freight engaged for these vessels is engaged entirely by the M Company and consists almost exclusively of freight shipped from the foreign country to the other side of the Atlantic through the American port.

Treasury Decision 3111 (C. B. 4, p. 280) provides, in the case of a foreign corporation, that if the income be taxed, the recipient thereof must have a domicile within the jurisdiction imposing the tax, or the property or business out of which the income issues must be situated within such jurisdiction so that the income may be said to have a

situs therein.

It appears from the statement of facts that the foreign steamship companies have no domicile within the United States.

The fact that the vessels' freight is transported from the foreign country through the United States can not be considered as evidence that the foreign steamship companies are deriving income from any activity on their part in the United States. It is true that income is derived from such transportation, but it is properly the income of the transportation corporations operating in the United States.

It is held that the foreign steamship companies of which the M Company acts as agent in the foreign country do not derive income from a source within the United States by reason of the fact that they receive, at a port within the United States, freight originating in a foreign country to be shipped to another foreign country. Income taxable in the United States is derived to the extent of freight charges paid to the companies within the United States in respect of shipments originating therein.

SECTION 233, ARTICLE 550: Gross income of foreign corporations.

(See 41-21-1863; sec. 237, art. 601.) Interest paid a foreign bank on amounts representing drafts drawn by a person in the United States and accepted by the foreign bank.

SECTION 233, ARTICLE 550: Gross income of foreign corporations. (See 46-21-1920; sec. 213(c), art. 92.) Sales f. o. b. a point in a foreign country by a foreign corporation.

SECTION 234.-DEDUCTIONS ALLOWED.

SECTION 234, ARTICLE 561: Allowable deductions.

32-21-1762

O. D. 989

Under the provisions of section 15-A of the Interstate Commerce Act, as amended by the Transportation Act approved February 29, 1920, railroad corporations are required to pay to the Interstate Commerce Commission one-half of their net railway operating income in excess of 6 per cent on their invested capital. It is understood that such payments are absolute, the railroad company having no present or future rights therein.

Held, that any sum so paid may be deducted in the taxable year in which paid or accrued, dependent upon whether the books of the corporation are kept upon a cash receipts and disbursements or accrual basis.

SECTION 234, ARTICLE 561: Allowable deductions.

33-21-1771 T. D. 3203

CORPORATION EXCISE TAX-ACT OF AUGUST 5, 1909-DECISION OF COURT.

1. DEDUCTIONS-SALARIES-DISTRIBUTION OF PROFITS.

The Government may attack the action of the board of directors of a corpora< tion and show by evidence, not that a given salary is too much, but that, in the circumstances, the whole or some part of it is not salary at all but is profits diverted to a stockholding officer under the guise of salary and as such is subject to taxation.

2. EVIDENCE-SUFFICIENCY TO REQUIRE SUBMISSION TO JURY-NONSUIT.

Where there was evidence that the activities of the president of a corporation in the business decreased as he advanced in years, that the vice president's duties and interests correspondingly increased, until, at the time in question, the president did almost nothing and the vice president did almost everything in the management of the corporation's affairs, and that a large increase in the salary of the president was voted by a board of directors wholly controlled by his dominating stock ownership, for the sole reason, stated by him, that the vice president's salary had been similarly increased and that he thought his salary should be the same as that of the vice president, a jury could find that the amount paid him was not all for services rendered, but was in part a distribution of profits; and a nonsuit was improper.