geographical sense includes only the States, the Territories of Alaska and Hawaii, and the District of Columbia" (section 1). This definition, it will be noted, does not include Porto Rico or the Philippine Islands, which have their own income tax laws.

REGULATION. (a) A citizen of the United States who resides in Porto Rico, and a citizen of Porto Rico who resides in the United States, are taxable in both places, but the income tax in the United States is credited with the amount of any income, war profits, and excess-profits taxes paid in Porto Rico. . . . (b) A resident of the United States, who is not a citizen of Porto Rico, is taxable in Porto Rico as a nonresident alien individual on any income derived from sources within Porto Rico, but the income tax in the United States is credited with the tax paid in Porto Rico. (c) A resident of Porto Rico, who is not a citizen of the United States, is taxable in the United States as a nonresident alien individual on any income derived from sources within the United States, and receives no such credit. . . The same principles apply in the case of the Philippine Islands. (Art. 1132.)

The same principles apply in the case of corporations similarly situated (Article 1133).

For a ruling see C. B. III-2, 251; I. T. 2118.

It is to be noted that under the provisions of an Act of Congress, known as "An Act making appropriations for the naval service for the fiscal year ended June 30, 1922, and for other purposes," 20 it was "Provided further, That the income tax laws now in force in the United States of America and those which may hereafter be enacted shall be held to be likewise in force in the Virgin Islands of the United States, except that the proceeds of such taxes shall be paid into the treasuries of said islands." This act was ratified and confirmed from and including July 1, 1921.

Income received by individual members of the Five Civilized Tribes of Indians, from tax-exempt lands allotted in severalty by the United States, is not subject to the income tax laws. (C. B. III-1, 85; T. D. 3570.) In Brunt's Appeal (5 B. T. A. 10/21) the Board upheld the Commissioner who contended that members of the Osage Indian tribe are subject to tax in respect of mineral rights. There is a strong dissenting opinion, concurred in by six members.

To the same effect as to lands allotted to Ponca Indians. (C. B. V-1, 193; S. M. 5632.)

Similarly income of Indians from lands over which their power of alienation is restricted is not taxable. (C. B. IV-2, 37; T. D. 3754.) But the income of an Indian from business and from

20 67th Congress, Sess. I., Chapter 44.

property given him by the Government without restriction is taxable. (C. B. IV-2, 29; S. M. 4527.)

Income from leases of Indian lands.—It has been held that the income of a lessee of oil lands belonging to the Osage Indians, arising out of the lease, is not taxable to him, on the theory that a guardian, the United States, cannot properly subject its ward, the Osage Indians, even indirectly, to taxes accruing to its benefit. [Colonial Trust Co. v. Lewellyn, 12 F. (2d) 481.]

But the Treasury ruled that income of the assignee of a lease of oil lands granted by a member of the Creek Tribe of Indians is taxable. (C. B. V-1, 183; S. R. 8498.)

Exemption of Profits from Sales of Vessels

21

The provision in the Merchant Marine Act of 1920 exempting from tax for ten years the gains arising from the sale of certain vessels, referred specifically to the taxes imposed by the Revenue Act of 1918. Of course, the "Revenue Act of 1926" is not the "Revenue Act of 1918," but as the Merchant Marine Act is still in force and as the exemption was to be for ten years, it should be held that the gains to be exempted are the same as those imposed by the Act of 1918 and that full exemption should be granted for the ten-year period.

The Treasury has held that the sale of the entire capital stock of a company owning ships, even though the proceeds of such sale were reinvested in American ships, could not be brought within the privileges of the act on the ground that the law specifically provides that the exemption applies only to the sale of ships. However, the purchase of capital stock is, under some circumstances, considered a "replacement" of an asset involuntarily converted. See Chapter 17.

21

LAW. During the period of ten years from the enactment of this Act any person a citizen of the United States who may sell a vessel documented under the laws of the United States and built prior to January 1, 1914, shall be exempt from all income taxes that would be payable upon any of the proceeds of such sale under Title I, Title II and Title III of the Revenue Act of 1918 if the entire proceeds thereof shall be invested in the building of new ships in American shipyards, such ships to be documented under the laws of the United States and to be of a type approved by the board [i. e., the United States Shipping Board provided for by Section 3 of the Act.] (Merchant Marine Act, 1920, section 23, paragraph 2, approved June 5, 1920, 41 Stat. at L. 996.)

Plan of treatment.-In the following fifteen chapters the various types of income subject to tax are discussed in detail. Income from personal services, business, property, interest, rents, dividends, etc., are taken up in regular order and the procedure peculiar to them is explained. However, in addition to these particular subjects there are many questions which are general in their nature and application. These are brought together for treatment in this introductory chapter.

Variations according to class of taxpayer.-Unless otherwise indicated, statements made in the text are to be accepted as applying to corporations and individuals alike. So much of the procedure applies to all classes of taxpayers that it has been deemed desirable to isolate only the exceptional points, indicating plainly in such cases the limitations upon the application.

"Catch-all" provision. The law states (section 213) that "gains or profits and income derived from any source whatever" are subject to the tax. To provide for possible lapses in the law and regulations the following "catch-all" provision was included in an early edition of the regulations. The statements are still pertinent.

REGULATION. The intent and purpose of the income-tax law is that all gains, profits, and income of a taxable class shall be charged and assessed with the corresponding income tax, normal and additional, and such tax shall be paid by the owner of such income or the proper representative thereof having the receipt, custody, control, or disposal of the same. In any case where the conditions which obtain do not appear to fall within the law and regulations for the assessment and collection of the income tax, the proper tax shall be assessed in the particular case by the Commissioner of Internal Revenue upon his findings concerning the same. Ownership of income and liability for tax thereon shall be determined as of the year for which the return is required to be rendered. (Reg. 33, 1918, Art. 49.)

Nature of taxable income.-The concept of income adopted in the law is not an entirely clear and logical one. In general it imposes the tax only when the income is reduced to money, but in certain cases it taxes income in forms other than money.

REGULATION. . . . . (a) Income (in the broad sense), meaning all wealth which flows in to the taxpayer other than as a mere return of capital. It includes the forms of income specifically described as gains and profits, including gains derived from the sale or other disposition of capital assets. Cash receipts alone do not always accurately reflect income, for the statute recognizes as income-determining factors other items, among which are inventories, accounts receivable, property exhaustion, and accounts payable for expenses incurred. (Art. 21.)

What is needed is an authoritative definition of "income." This cannot be found in the decisions of the Supreme Court, because they contain too many differentiations and limitations to make clear what a decision will be in any future case.

The following definition of income is of interest. Applied to taxable income, however, it should include the word "realized." "Income is the money value of the net accretion to one's economic power between two points of time." 1

The regulations define income as follows:

REGULATION.

In general, income is the gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital assets. . . (Art. 31.)

This definition is taken from the opinion in Eisner v. Macomber (252 U. S. 189, 207). Courts have displayed a tendency, in several succeeding cases, to determine whether a doubtful item is income by inquiring whether it can be brought within this definition. This

1Robert Murray Haig, "The Concept of Income-Economic and Legal Aspects," The Federal Income Tax, Columbia University Press, 1921.

tendency seems to the author regrettable as a matter of technical procedure, although it usually operates to the advantage of the taxpayer. In the first place, the definition does not purport to be allinclusive and hence should not be used as an infallible test in excluding items from the category of income. In the second place, the attempt to decide doubtful cases on the basis of a stock definition is likely to result in rationalizing to secure a desired result, rather than in a careful analysis of business practice in and understanding of the particular situation. For these reasons, although the result in Bowers v. Kerbaugh-Empire Co. [300 Fed. 938; affirmed in 70 L. Ed. 518 (Adv. Op.)] and Jones v. U. S. (60 Ct. Cls. 552) may be correct, the manner in which the result was reached leaves something to be desired.

It appears from some court decisions that doubt exists as to the taxability of certain transactions which involve so-called capital. The Circuit Court of Appeals, Second Circuit, held that a gift to a corporation is not taxable income. (U. S. v. Oregon-Washington R. & Nav. Co., 251 Fed. 211.) In defining the word "income," the court said: . . . . it (income) should not include such wealth as is honestly appropriated to what would customarily be regarded as the capital of the corporation." One judge, dissenting, said: “I find no difficulty in calling it (the gift to the corporation) income."

66

Under the circumstances, no apology is needed to justify a careful inquiry into the right of Congress or of the Treasury to extend the taxation of income-which is permitted under the sixteenth amendment to the taxation of capital-which is not permitted. Such an inquiry naturally should cover the right to tax any transaction unless there is an actual realization of income, as distinguished from the apparent income which may be, and often is, the result of temporary fluctuations in values.

FUNDS PAID IN FOR SPECIFIC PURPOSE NOT INCOME.-In Los Angeles Cemetery Association's Appeal [2 B. T. A. 495 (A)] the taxpayer received from purchasers of lots money to be used for the perpetual care thereof. The Commissioner contended that the amounts received were income. (See also C. B. IV-1, 219; S. M. 1591.) The Board overruled the Commissioner and said:

DECISION. None of the moneys paid into the "perpetual care fund” can be used for any purpose other than that specified in the contract. Such funds can not be used for the profit of the taxpayer, nor can they be used for the benefit of the stockholders. They can be used only for