SECTION 212, ARTICLE 22: Computation of net income. 38-21-1826 O. D. 1036 The following rates have been accepted by the Bureau as the current or market rates of exchange on Argentine paper currency (peso) prevailing as of December 31, 1918, 1919, and 1920: The rate of discount accepted by the Bureau as applicable to Canadian currency as of April 21, 1917, is 0.10875 (discount on demand checks). SECTION 212, ARTICLE 22: Computation of net income. (See 41-21-1859; sec. 202, art. 1567.) Exchange upon reorganization, consolidation, or merger of stock of domestic corporation for stock of English corporation. SECTION 212, ARTICLE 22: Computation of net income. 42-21-1869 O. D. 1065 The following rates have been accepted by the Bureau of Internal Revenue as the current or market rates of exchange prevailing as of December 31, 1916, 1917, and 1918: $212] SECTION 212, ARTICLE 22: Computation of net income. (Also Section 256, Article 1072; Section 1314, Article 1733.) 42-21-1870 O. D. 1066 During the year 1920 a domestic corporation employed several American citizens in Canada, such employees working entirely on a commission basis and receiving payment each week in Canadian money. When filing information returns, the corporation should compute each commission separately in accordance with the rate of exchange on the date paid or credited to the employee's account and report on Form 1099 the aggregate amount paid during the taxable year. The employee should likewise compute his commissions according to the rate of exchange at the time each commission is received or credited to his account and report the aggregate amount received during the taxable year. An American citizen may not pay his income tax by a check on a foreign bank in foreign funds, but should pay it in United States funds. Inasmuch as the United States and Canada maintain direct exchange of money orders on a domestic basis, it is permissible for an American residing in Canada to pay his income tax by Canadian postal money order at par. SECTION 212, ARTICLE 22: Computation of net income. 51-21-1977 O. D. 1137 The following rates of exchange are accepted as the current or market rates of exchange prevailing for the countries and as of the dates indicated: income. 51-21-1978 O. D. 1138 The following rates have been accepted by the Bureau of Internal Revenue as the current or market rates of exchange on Hongkong currency prevailing as of December 31, 1916, 1917, and 1918: December 31, 1916 December 31, 1917. December 31, 1918. $0.57 =1 Hongkong dollar. SECTION 212, ARTICLE 23: Bases of computation. 29-21-1731 O. D. 977 Prior to the year 1920 a taxpayer employed the cash receipts and disbursements method of computing his income from all sources, which income was made up of interest on securities, royalties on books, income from a partnership which maintained its books on the cash basis, and income from a publishing business, the books of which were maintained on the cash basis. In January, 1920, the taxpayer installed an accounting system for the purpose of reporting income from the publishing business, and he states that in his opinion the income from this business should be reported on the accrual basis and requests permission to change the method of computing his income from the cash receipts to the accrual basis. The income from the partnership is still kept on the cash basis, and no formal books of account are kept showing the income from other sources. In view of the conditions outlined the taxpayer is required to use the basis of cash receipts and disbursements in computing his income from all sources, including that from the publishing business. SECTION 212, ARTICLE 23: Bases of computation. (Also Section 203, Article 1582.) 66 31-21-1750 A. R. M. 135 Held, that dealers in cotton and grain, and in such other commodities as are dealt in in a similar manner, may, for the purpose of determining taxable income, incorporate in their balance sheets at the close of any taxable year, such open "future" contracts to which they are parties as are hedges against actual "spot" or cash transactions: Provided, That no purely speculative transactions in "futures" not off-set by actual spot" or cash transactions, may be so included or taken into the taxpayer's account in any manner until such transactions are actually closed by liquidation: And provided further, That the values of the commodity covered by such open "future" contracts shall not be added to nor deducted from the inventory of the taxpayer. 66 The leading grain and cotton exchanges of the country and some of the leading individual dealers in those commodities, have appeared by counsel or in person before this Committee to urge that "hedge " transactions in "futures" shall be accorded recognition in the taxpayer's balance sheet at the close of each taxable year and shall be thus taken into consideration in computing taxable income. Such consideration has been denied by the Income Tax Unit to taxpayers engaged in these lines of business for the reason that transactions in "futures" have been held not to be “closed transactions" within the meaning of the regulations, where such transactions, entered into in one taxable year, had been carried forward into the year following. In thus holding, the Unit appears to have relied very largely upon this Committee's Memorandum No. 100 (C. B. 3, p. 66), which is concerned with the inventories of cotton and grain merchants, wherein it was stated that: There is in fact no profit or loss in the purchase of a commodity until the transaction has been completed by the sale of that particular commodity, nor is there any profit or loss in a transaction in "futures" until the transaction has actually been closed. In drafting this memorandum, however, the Committee was considering nothing more than the inventories of cotton and grain merchants, no other aspects of the case being at that time under consideration, and what was said in that memorandum referred only to the valuation of such inventories and to the proposal to determine profit or loss by treating such transactions either as additions to or deductions from the taxpayers' inventories. Nothing more than this nor any other aspect of "hedge" transactions was then under consideration, and if a broader interpretation has been placed upon this dictum, it is because the Unit has not recognized the limitations within which it was then being discussed by the Committee; although so far as it may be regarded as being misleading, the Committee desires now to modify it to the extent hereinafter set out in this memorandum. The Committee knows of no better way of presenting the arguments of taxpayers engaged in these lines of industry so as to give them full force and effect than by reproducing in this memorandum the briefs, as submitted by counsel, substantially in full. There follow, therefore, the briefs submitted to the Committee relative to the cotton and grain industries. The brief relative to the cotton industry is as follows: We desire to submit that cotton, being a commodity that is absolutely liquid, and which at any time during any year can immediately be converted into cash, because there is always an open market for it, it is possible to determine upon any given date during the fiscal or calendar year of any cotton concern its exact status and the exact amount of its net profit or net losses as upon that date. The business of the cotton merchant is the buying and selling of cotton. Being a commodity that is always obtainable, the cotton merchant does not carry, as a rule, a stock of any considerable size, because cotton, being valuable and bulky, the insurance and storage upon it would eat rapidly into his profits. In addition, his business being conducted to at least ninety per cent of its extent upon borrowed capital, the item of interest, if a large stock be carried, would further destroy profits. Hence the business is conducted largely upon the basis of forward sales and purchases. FORWARD SALES. A forward sale is a firm contract entered into by and between the cotton merchant and the spinner, or dealer in cotton, in Europe or other country, for a certain number of bales of cotton at a fixed price for shipment at a specified time. This is a valid and enforceable contract. FORWARD PURCHASES. A forward purchase means a firm contract by a cotton merchant under which he contracts to buy at a fixed price a certain number of bales of cotton of a certain grade, for delivery to him at a specified time. This is likewise an enforceable and valid contract. HEDGES. A hedge, in reality, is a counterbalancing transaction under which a given quantity of cotton is either purchased or sold at a fixed price in order to offset and counterbalance the sale or purchase of a certain number of bales of cotton at a fixed price. It is the only system known by which a cotton merchant can do a safe business and keep from gambling in cotton, and such practice is demanded by all banks that furnish credit to the cotton merchant. Ordinarily, however, in the trade a hedge is the purchase or sale through a broker or an exchange, under the rules of which contracts for future delivery are made of a certain number of bales of cotton at fixed prices, for delivery at a future date, based upon the market quotations which appear from hour to hour upon the board of the exchange. Hedging transactions in cotton are governed by the Cotton Futures Act embodied in the United States Revised Statutes, article 6309-a to 6309-v, inclu sive, and such transactions are legal and are enforceable through the courts when entered into in good faith. (Prior to the passage of this law exchange contracts were held valid in Bibb v. Allen, 149 U. S.; Bond v. Hume, 243 U. S.) * A hedge is simply a transaction entered into by the cotton merchant for the purpose of insuring, so far as may be possible, the profit which the merchant figures that he has in the instant transaction at the time it is made. To illustrate, if a cotton merchant makes a contract in January with a European spinner to deliver or ship to him in the following November 1,000 bales of cotton at a specified price per pound, the cotton merchant, not then having the cotton on hand, through his broker on the exchange makes a purchase of 1,000 bales of cotton for delivery to him in the month of September or October, as the case may be. This purchase is made at the market price for September or October cotton as reflected by the quotations on the exchange at the particular hour at which the transaction is closed. A margin is deposited with the broker to guarantee against loss in the transaction. In figuring the basis of his sales to the European spinner, the cotton merchant demands a premium or profit above the market price upon that given date. The European spinner, knowing the man with whom he is dealing and knowing that he is going to get cotton of the class and character which he buys, is willing to allow a reasonable profit to the cotton merchant, and in order to insure this profit the cotton merchant then makes his purchase of that number of bales of cotton upon the exchange at the then market price. When a cotton merchant buys cotton for shipment against his forward sales, he closes his hedge for the number of bales so bought. Likewise, if he purchases cotton to have a stock on hand to sell for immediate delivery, he hedges that cotton by selling on the exchange an equivalent number of bales. When he sells the cotton so purchased, he then closes his hedges in the exchange. As the cotton merchant buys and sells from day to day, both for immediate and future shipment, it can be readily seen his hedges are constantly being opened and closed, and that upon the hedge either upon the exchange or forward sale against cotton on hand, that his profit in his business is insured against loss incident to the fluctuations of the market. In the cotton business the cotton merchant begins buying his cotton and assembling it from the time that the cotton season opens. He buys all over his own State from day to day at constantly changing prices. The cotton so bought is concentrated at various large shipping points at which compresses are situated, as cotton is bought in what is called "gin" bales and is always shipped after being compressed or in a compressed bale. The necessity for compression is to increase the density and decrease the size of the bale in order to save freight. The bales bought by the cotton merchant from day to day at different prices during the course of a season consist of every known grade of cotton. In the shipment of cotton it is shipped always in lots of the same grade; consequently, in order to obtain the number of bales of one grade requisite for a shipment, that number of bales may be taken from as many as twenty-five to fifty different lots of cotton purchased, each lot purchased at a different date at a different price. The identity of the individual bale is not retained, and the cost of the individual bale is not kept by the cotton merchant and can not be, owing to concentration of all cotton bought and continued additions and shipments from the whole lot, but the value of the cotton on hand can always be determined because of the market quotations and the fact that the commodity is liquid and immediately convertible into cash. At the close of the year, either fiscal or calendar, the cotton merchant takes an inventory of the cotton on hand. This cotton consists of bales purchased from the first day of the season to the last and represents a wide difference in price paid. The universal practice has been to inventory at market, because that tells the real value of his commodity; further, because the identity of the bale and the matter of cost can not be determined, hence it is impossible to take it other than at the market price. In the keeping of books in the cotton business, it has been the custom, existing over a period of approximately 50 years, for the cotton merchant to take into consideration at market his forward sales, purchases, and hedges, and if they show a profit, that is added to the season's business. If, on the other hand, they show a loss, it is deducted from the season's business. His real profit, or loss, is thereby determined for the year. This system of bookkeeping is the only accurate and correct system that has been devised that truly reflects |
