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Where stock has been purchased for any purpose and afterwards dies from disease or injury or is killed by order of the authorities of a State or the United States and the cost thereof has not been claimed as an item of expense, the actual purchase price of such stock, less any depreciation which may have been previously claimed, may be deducted as a loss. Property destroyed by order of the authorities of a State or of the United States may in like manner be claimed as a loss; but if reimbursement is made by a State or the United States, in whole or in part, on account of stock killed or property destroyed, the amount received shall be reported as income for the year in which reimbursement is made.

The cost of farm machinery is not an allowable deduction as an item of expense, but the cost of ordinary tools may be included under this item.

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Under paragraph 7 of section 5 (a), act of 1916, providing for "a reasonable allowance for the exhaustion, wear, and tear of property arising out of its use or employment *" there may be claimed a reasonable allowance for depreciation on farm buildings (other than a dwelling occupied by the owner), farm machinery, and other physical property, including stock purchased for breeding purposes, but no claim for depreciation on stock raised or purchased for resale will be allowed.

A person cultivating or operating a farm for recreation or pleasure, on a basis other than the recognized principles of commercial farming, the result of which is a continual loss from year to year, is not regarded as a farmer. In such cases if the expenses incurred in connection with the farm are in excess of the receipts therefrom, the entire receipts from sale of products may be ignored in rendering a return of income, and the expenses incurred being regarded as personal expenses, will not constitute allowable deductions in the return of income derived from other sources.

An individual engaged in raising and selling stock (cattle, sheep, horses, etc.), is not entitled to claim as a loss the value of such animals raised as die. The cost of raising will have been taken as an expense deduction. In the case of animals purchased, which die, the amount of purchase money will be an allowable deduction, if not previously deducted as a business expense.

In case of sale the total amount received for stock raised and for stock purchased for resale is to be accounted for as income.

Orchards and ranches.-Amounts expended in the development of orchards and ranches prior to the time when the productive stage is reached constitute investments of capital.

Bonus. Where common stock is received as a bonus in consideration of the purchase of preferred stock, the entire proceeds derived

from the sale or transfer of such stock is income subject to the normal and additional tax.

Gifts. The fair market price or value of stock acquired by gift 41 subsequent to March 1, 1913, is the basis for computing gain derived or loss sustained by the sale thereof. If acquired by gift prior to March 1, 1913, the fair market price or value as of that date is the basis for computation.

Interest on exempt bonds, corporation.-Interest on Statę, municipal, 42 and United States bonds received by corporations is not taxable to the corporation. Upon amalgamation with other funds of the corporation such income loses its identity. When distributed to stockholders as a dividend, the entire amount of the dividend is subject to inclusion in returns of income for the purposes of the income tax. The foregoing holds true for scrip payment of interest. Value of property acquired by inheritance.-The appraised value at 44 the time of the death of a testator is the basis for determining gain or profit upon sale subsequent to the death after March 1, 1913.

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Insurance. Where insured receives, under any form of life insur- 45 ance, an amount in excess of premiums paid for the insurance, such excess has a taxable status and is to be accounted for as for the calendar year of its receipt.

Life insurance.-Dividends on paid-up policies are in the nature of 46 corporate dividends and are to be accounted for as income for the purposes of the additional tax only.

Officer or employee of a State.-An individual who enters into a 47 contract with a State, or any political subdivision thereof, for the doing of a thing or things specified by the contract, the completion of which will constitute a fulfillment of the contract on the part of such individual, is not an officer or employee of the State or political subdivision thereof within the meaning and intent of section 4 of the income-tax law and the amount received by him from the State or political subdivision thereof under the terms of the contract is to be accounted for as income.

Partnerships. It is held that the income of a partnership accrues 48 to the individual partner at the time his distributive interest is determined. In the returns of income made by individuals for the calendar year there should be included such incomes accruing from the business of partnerships for the business years of the partnerships as may have been definitely ascertained by means of a book balance, whether distributed or not. Members of partnerships are required to make returns of income, as individuals, for the calendar year, and should include in their returns of income their interest in partnership profits ascertained at the end of the business year falling within the calendar year for which the individual return is being rendered. (See. art. 30.)

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Pensions.-Pensions paid by the United States, private institutions, or individuals are to be accounted for, for income tax purposes, in all cases where income of the pensioner is liable for income tax.

Permanent improvements under lease or rental contracts. When improvements become a part of real estate, the difference between cost of the improvements and allowable depreciation during the lease term is gain or profit to the lessor at the end of the lease term and is to be accounted for as income at that time. (T. D. 2442.)

Receipt basis. Actual receipt is a reduction to possession. Constructive receipt is where income is credited to or made available to recipients and is to be reported as income; as credit to account of recipents of savings-bank interests, etc.

In the case of compensation for service rendered, where no determination of compensation is had until the completion of the service, the amount received in consideration of the service is income to be accounted for as for the calendar year of its receipt.

Where the service and payment period is divided by the end of the taxable year, the compensation for the period so divided at the end of the year will be accounted for as income for the year in which payment is actually received. Where the service is compensated by fee, or is of such nature that no part of the fee or compensation becomes due until the completion of the service, the entire amount received should be income to be accounted for as for the year of receipt.

A person having a salary by the year and in addition commissions on sales, the salary to be paid at the time commissions are determined, and the determination of commissions is in the succeeding calendar year, the entire amount of salary and commissions should be accounted for as income of the calendar year of receipt.

Reimbursement.-Per diem allowance in lieu of subsistence while under traveling orders; the total allowance is income and there may be taken as a deduction for expense the amount actually expended from such allowance for actual necessary traveling expenses.

Renewal premium.-Commissions on renewal premium for insurance received by agents on account of business written is income to be accounted for as such and for the calendar year of its receipt.

Rent.-Amounts expended by tenants for taxes and necessary repairs under agreement, in addition to a stipulated cash rental, are items of taxable income, and as such should be reported in the return of the landlord. A corresponding amount may be deducted by the landlord.

Retired pay.-Retired pay of Army and naval officers and judges of United States courts is subject to the income tax.

Royalty.-Royalty paid to a proprietor by those who are allowed to develop or use property, or operate under some right belonging to him, is to be accounted for as income.

Profit from the sale of stock.-When stock is sold from lots purchased 60 at different times and at different prices and the identity of the lots can not be determined as to dates of purchase, the stock sold shall be charged against the earliest purchases of such stock. The difference between cost and amount realized on the sale will be the profit to be accounted for as income if the purchase was on or after March 1, 1913. Profit derived from the sale of stock purchased prior to March 1, 1913, is the difference between the fair market price or value as of that date and the selling price.

Sale of rights.-Amount realized from sale of rights to subscribe 61 to stock is held to be income to the seller.

Sale of stock.-When a nonresident alien who owns stock in an 62 American corporation disposes of same by sale, the sale and delivery being made within the United States, the profit will be held to have been derived from sources within the United States and is to be included for the purposes of income tax.

Value as of March 1, 1913, method of determining.-No method of 63 determining this value can be stated by the department which will adequately meet all circumstances. What that value was is a question of fact to be established by any evidence which will reasonably and adequately make it appear.

EXEMPT INCOME.

Art. 5. There shall not be included as income

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(a) The proceeds of life-insurance policies paid to beneficiaries 65 upon the death of the insured.

(b) Amount received by the insured, as a return of premium or 66 premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or the surrender of the contract.

(c) Value of property acquired by gift, bequest, devise, or descent 67 (but income from such property shall be reported as income).

(d) Interest on obligations of a State or any political subdivision 68 thereof.

(e) Interest on obligations of the United States (but, in the case of 69 obligations of the United States issued after September 1, 1917, only if and to the extent provided in the act authorizing issue thereof),1 or its possessions.

(f) Interest on securities issued under provisions of Federal farm 70 loan act, July 17, 1916.

(g) Compensation of all officers and employees of a State or any 71 political subdivision thereof except when such compensation is paid by the United States Government.

1 Interest from United States bonds and certificates, authorized by the act of September 24, 1917, in excess of the interest on an aggregate principal amount of $5,000 of such bonds and certificates in one ownership must be reported for the purpose of the graduated additional income tax.

(h) For purposes of income tax under act of October 3, 1917, the coinpensation of the President of the United States for the term for which he is elected, beginning March 4, 1917 (such compensation being subject to tax under the act of Sept. 8, 1916). Compensation of all judges of the supreme and inferior courts of the United States in office September 8, 1916, and October 3, 1917, compensation of judges of these courts appointed subsequent to September 8, 1916, being subject to tax under act of that date but not under act of October 3, 1917; and compensation of judges of such courts appointed subsequent to October 3, 1917, being subject to tax under both acts.

Art. 6. Net income is the difference between gross income and the sum of allowable deductions.

DEDUCTIONS.

Art. 7. Citizens and resident aliens are given the deductions and credits provided by section 5 of the act of September 8, 1916, as amended by the act of October 3, 1917.

Nonresident aliens are given deductions and credits as provided by section 6 of that act.

CITIZENS AND RESIDENT ALIENS.

Art. 8. The deductions provided by section 5 of the law are: First. Necessary expenses actually paid in carrying on any business or trade, not including personal, living, or family expenses.

Second. Interest paid within the year except that paid on indebtedness for purchase of obligations or securities, the interest on which is exempt from income tax,

Third. Taxes: State, or any political subdivision thereof, Federal or foreign (except income and excess profits taxes paid to the United States), and not including taxes assessed against local benefits.

Fourth. Losses sustained during the year, incurred in his business or trade, or arising from fires, storms, shipwreck, or other casualty and from theft, when such losses are not compensated by insurance or otherwise.

Fifth. Losses actually sustained during the year in transactions entered into for profit but not connected with his business or trade to the extent of but not exceeding the profits arising from such transactions.

Sixth. Debts due to taxpayer actually ascertained to be worthless and charged off within the year.

Seventh. Depreciation in an amount representing exhaustion from wear and tear of property arising out of its use or employment in business or trade, but no deduction shall be allowed for any amount paid out for new buildings, permanent improvements or betterments