confusion in the use of this term but in Clearfield Lumber Company's Appeal (3 B. T. A. 1282) the Board says:

DECISION. Both the Commissioners and representatives of taxpayers have fallen into awkward and confusing terminology in connection with the difference between cost and March 1, 1913, values reflected in depletion allowances, terminology which appears to have added to the confusion in the instant case. It has been the habit to call this differential "realized appreciation," whereas, in fact, it is merely tax-free income. It appears to be the intent of the statute and the regulations not only that taxpayers shall have returned to them free of tax the cost of the property acquired, but, also, if acquired before March 1, 1913, that they shall exclude from taxable income, as income is realized from the sale of other disposition of such property, that portion of the profits represented by the difference between cost and value on March 1, 1913. This view has been recognized by the Supreme Court. Goodrich v. Edwards, 255 U. S. 527. In the case of a sale of property, where the March 1, 1913 value is in excess of cost, the computation of taxable gain as distinguished from actual gain is readily made by subtracting the March 1, 1913, value from the selling price.

The Supreme Court and other courts have frequently referred to the property of taxpayers at March 1, 1913 as capital, and in an economic sense all that one reduces to possession becomes capital immediately. Therefore, the term "tax-free income" would appear to be more confusing than the term "realized appreciation."

In accounting and business terminology one speaks of partnership capital at the beginning of a fiscal or accounting period and refers to the additions to or reductions from the capital as profit or loss for a specified period. This, however, is merely a matter of convenience since there is no legal distinction between the completed and the current periods.

There is nothing sacred about the income for December 31 as distinguished from that for January 1 of the succeeding year. It merely happens to fall into different accounting periods.

It will not assist in the interpretation of our tax laws if we commence to call the realization of any part of value at March 1, 1913 "tax-free income."

The term "tax-free income" is too broad to describe satisfactorily the item.

When we say "realized appreciation" we really mean an item which is

1. realized upon the sale of the mineral;

2. determined by the excess of the value at March 1, 1913, over

a portion of original cost allocated to it by the depletion formula, and

3. non-taxable because it is an appreciation over cost already recognized by the law as capital because in existence and susceptible of valuation as of March 1, 1913.

Even though the term "realized appreciation" is awkward it would be quite improper to use the word "income" as descriptive of what the law recognizes as capital. We must seek some other term if we change our terminology. We might use with accuracy "tax-free appreciation realized through depletion," but that is even more awkward. If we wish to distinguish between appreciation which is taxed and appreciation which is not taxed we could use the terms "pre-tax" and "post-tax" appreciation. If we must accurately describe it we are driven to "pre-tax, depletion-realized appreciation!" The author is satisfied to continue the use of the term "realized appreciation," never having had any trouble with it.

Salaries of the President and United States judges.-It has been held by the Supreme Court of the United States that the salaries of the President and federal judges are not taxable. (Evans v. Gore, 253 U. S. 245; Miles v. Graham, 268 U. S. 501.)

Although these decisions were handed down prior to the passage of the 1926 act, Congress reenacted in that act the provision contained in the 1918, 1921 and 1924 acts [section 213 (a)] which required the inclusion in gross income of the compensation received by the President and federal judges as such. This provision is now invalid under any act.

RULING. Income taxes assessed on the salaries of judges of the United States courts, both after as well as before retirement, are illegal and are refundable in accordance with the provisions of the law. (C. B. IV-2, 41; I. T. 2202.)

Compensation of federal officers in general not exempt.

REGULATION.

are subject to tax.

The salaries of Federal officers and employees (Art. 32.)

For salaries of the President and federal judges see above.

It has been ruled that the decision in Evans v. Gore 2 (253 U. S. 245) does not apply to referees in bankruptcy (C. B. 3, 104; O. D. 678), or judges of territorial courts (C. B. 4, 83; O. D. 899) such as

Published in C. B. 3, 93; T. D. 3037.

those of Alaska (C. B. IV-2, 42; I. T. 2226). It does apply, however, to members of the Board of United States General Appraisers appointed prior to the enactment of the Revenue Act of 1918 (C. B. II-2, 68; I. T. 1739.)

Salaries of state officers and employees exempt.-Although there has been no statutory exemption of the salaries of state officers and employees from the federal income tax since. 1917, such salaries have not been taxed because of the supposed constitutional restriction discussed by the Supreme Court in Collector v. Day (78 U. S. 113). It might be urged that this restriction was removed by the sixteenth amendment giving Congress the power to tax incomes "from whatever source derived." The Supreme Court has evidently taken the view, however, that the amendment did not extend the taxing power of Congress to items previously exempt.3

The question of what constitutes an officer or employee of the state or its subdivisions has given the Treasury and the courts considerable difficulty. An opinion of the Attorney General (31 Op. A. G. 441), as well as Article 88 of Regulation 65, give color to the proposition that the exemption does not extend merely to officers and employees of essential governmental functions of the states or municipalities but to all officers and employees. However it is doubtful whether Collector v. Day, or the recent decision of Metcalf v. Mitchell (269 U. S. 514) require an exemption on constitutional grounds except in the case of officers and employees of essential governmental activities of the states and municipalities.

REGULATION. Compensation paid to its officers and employees by a State or political subdivision thereof for services rendered in connection with the exercise of an essential governmental function of the State or political subdivision, including fees received by notaries public commissioned by States and the commissions of receivers appointed by State courts, is not taxable. Compensation received for services rendered to a State or political subdivision thereof is included in gross income unless (a) the person receives such compensation as an officer or employee of a State or political subdivision and (b) the services are rendered in connection with the exercise of an essential government function. But see section 1211 as to 1924 and prior years.

An officer is a person who occupies a position in the service of the State or political subdivision, the tenure of which is continuous and not

See "Tax Exemption of State Employees," by Roswell F. Magill, 35 Yale Low Journ., 956, for a full discussion of the decisions and the present state of the law.

temporary and the duties of which are established by law or regulations and not by agreement. An employee is one whose duties consist in the rendition of prescribed services and not the accomplishment of specific objects, and whose services are continuous, not occasional or temporary. Employees of universities receiving salaries paid in part or in whole from funds available under the Smith-Lever Act of May 8, 1914, who are officers or employees of a State, are not required to return as taxable income the salaries so received. This is also true with respect to the Act of August 30, 1890, relating to colleges for the benefit of agriculture and the mechanic arts, and to the Act of March 2, 1887, relating to agricultural experiment stations in such colleges. As to State contracts, see Article 37. (Art. 88.)

The Treasury has applied, at least recently, the test set forth in the new regulations. Examples of exemptions granted by the Treasury are the following:

Attorneys employed by state, when relation of employer and employee obtains. (C. B. 5, 113; O. D. 1099.)

Chief engineer appointed by sewerage commission.* (C. B. 1, 96; O. D. 309.)

But

County surveyor. (C. B. 1, 96; O. D. 33.) Deputy sheriff. (C. B. 5, 106; O. D. 1053.) National guard. (C. B. 4, 112; O. D. 942.) But compensation during field training when paid by federal government, is taxable. Notary's fees in partnership income. C. B. 3, 125; O. D. 648.) fees turned over by a notary to taxable income to the corporation. Public administrators of the State of 1693.)

his employer, a corporation, are (C. B. II-1, 72; I. T. 1685.) Missouri. (C. B. II-1, 72; I. T.

Receiver. Exempt as to fees arising from appointment by state court, but fees from federal appointment are taxable. (C. B. 2, 99; O. D. 503.)

Receivers of insolvent state banks in Kansas. (C. B. IV-2, 46; I. T. 2214.)

Referee in drainage suit appointed by state district judge. (C. B. 2, 100; O. D. 525.)

Retired New York State employees receiving allowances paid under the New York State Employees' Retirement System. (Ċ. B. II-1, 71; I. T. 1607.)

Secretary of Kansas State Fair Board. (C. B. V-1, 45; G. C. M. 60.) Sheriff, as to excess of allowance over actual cost of feeding state and federal prisoners, when laws of state permit retention by sheriff of such excess. (C. B. III-2, 82; S. M.2322.)

Special counsel to state comptroller. (C. B. 2, 99; O. D. 494.) Special deputy bank examiners and clerks, State of Washington. (C. B. I-1, 105: I. T. 1316.) But the compensation of attorneys appointed by the State Bank Examiner is not exempt. (C. B. I-1, 105; I. T. 1316.)

State agricultural college employees. (C. B. III-2, 84; S. M. 2726.) State employees under the Sheppard-Towner Act, provided services are

See also Metcalf v. Mitchell, 299 Fed. 812.

continuous and not occasional or temporary. (C. B. II-1, 71; I. T. 1652.)

State jurors. (C. B. 2, 98; O. D. 434.)

State library employees, where library is operated for the use of the public, either directly or through a board of trustees controlled by the state. (C. B. IV-2, 43; S. M. 3811.)

State officers and employees of departments of agriculture, highways and banking. (C. B. IV-2, 47; I. T. 2233.)

Supt. of Water Works. (Durkin's Appeal, 4 B. T. A. 743.)
Virginia debt commissioners. (C. B. 1, 96; O. D. 257.)

The Supreme Court has held in Metcalf v. Mitchell (269 U. S. 514) that engineers receiving payments from states or political subdivisions for professional services were not exempt from income tax thereon, where they were not in fact officers or employees but were free to accept other concurrent employment. The mere fact that compensation is paid by the state does not entitle the recipient to exemption. For a further discussion of what constitutes an officer or employee, see page 289.

OFFICERS AND EMPLOYEES ENGAGED IN NON-GOVERNMENTAL FUNCTIONS.-The Treasury, prior to the enactment of the 1926 law, advanced the theory that while officers and employees of states engaged in essential governmental activities were exempt, the officers and employees of states who were engaged in non-governmental activities (such as publicly owned utilities) were not exempt. To meet this situation section 1211 was enacted.

LAW. Section 1211. Any taxes imposed by the Revenue Act of 1924 or prior revenue Acts upon any individual in respect of amounts received by him as compensation for personal services as an officer or employee of any State or political subdivision thereof (except to the extent that such compensation is paid by the United States Government directly or indirectly), shall, subject to the statutory period of limitations properly applicable thereto, be abated, credited, or refunded.

While taxes paid in the past may be recovered (if the statute of limitations has not expired) there can be no further doubt but that Congress has adopted the Treasury's interpretation so far as income earned since January 1, 1925, is concerned. The Treasury has announced that it will cease to demand returns for 1924 and prior years from officers and employees of states and political subdivisions. thereof who are not engaged in essential governmental functions. (C. B. V-1, 36; Mim. 3397.)

In S. M. 5490 (C. B. V-1, 37) the Treasury held that the compensation of officers and employees of the Rural Credit Board of