RULING. In the case of those railroads which were operated under Federal control without any contract having been entered into by the Director General of Railroads, the certification by the Interstate Commerce Commission as to what their standard return showed should form a definite basis for an accrual of just compensation, and any excess should be included in income in the year in which allowed or paid, dependent on the method the taxpayer employed in keeping his accounts. [O. D. 642 (C. B. 3, 231) overruled.] (C. B. III-2, 72; S. M. 1621.)

Where no contract was entered into with the Director General of Railroads, the railroad should have accrued only 90 per cent of the tentative certificate (or income of the test period, if no tentative certificate was made) as under section 2 of the Federal Control Act 1916, no greater amount was available to the railroad unless it appealed to a board of referees, appointed under section 3 of that act, or unless suit was brought in the Court of Claims. If any amount greater than 90 per cent of the standard return was finally received, either by award of the Director General, the Board of Referees, the Court of Claims, or by subsequent contract, such excess should be returned as income in the year in which the final determination is made.

It does not seem to be a sound principle to take up as income amounts which can only be collected by suit.

In Illinois Terminal Co.'s Appeal (5 B. T. A. 15) the Board upheld the Commissioner in his contention that the entire amount accruing was income as of the period of accrual (January 1, 1918 to March 1, 1920), even though the railroad refused to make a contract covering compensation, refused to accept 90 per cent on account and received no compensation until 1922.

There were six dissents from the decision.

There is much merit in the Board's decision but it is an extreme and technical application of the accrual method of accounting. It is to be hoped that the Board will follow a similar line of reasoning in accruing items of expenses, debts and losses.

RAILROAD ADJUSTMENT ON ORDER OF I. C. C.

RULING. Adjustments made in accordance with instructions from the Interstate Commerce Commission, increasing the income of a railroad corporation from transactions in prior years and taken up on the books of the corporation during the taxable year because necessary information was not available prior to that time, represent income for the years during which the transactions took place instead of the taxable year. Corrections should be made by means of amended returns. (C. B. 1, 58; O. D. 9.)

GUARANTY UNDER TRANSPORTATION ACT, 1920.—

RULING. Where carriers accepted the provisions of section 209 of the Transportation Act of 1920, relative to the compensation payable to them by the Government for the six months' "guaranty period" immediately following their release from Government control on March 1, 1920, and irrespective of whether or not they had entered into contracts with the Director General of Railroads relative to the amount of compensation payable under the Federal Control Act, they should accrue for the year 1920 the amount claimed to be due from the Government and accrued on their books under the orders of the Interstate Commerce Commission, subject to correction, however, upon the final determination of the proper amount, providing their accounts are kept, upon the accrual basis. If they are kept upon the cash receipts and disbursements basis, the amounts received will constitute taxable income for the year of their receipt. (C. B. IV-1, 127; S. M. 2970.)

A carrier which was not actually taken over by the Government during the period of federal control sustained a deficit during the socalled test period less than its deficit during the period of federal control. Having no contract with the Government it was entitled to no compensation under the Federal Control Act of 1918, but it was entitled to compensation under the Transportation Act of 1920. The Treasury first held that the compensation was taxable during the years covered by the period of federal control (C. B. I-1, 91; I. T. 1326). The Solicitor revoked this ruling (C. B. IV-2, 152; I. T. 2242) holding that the compensation was taxable in 1920 (C. B. IV-2, 149; S. M. 4236).

Income from personal services includes not only salaries and wages, but also fees received from professions or vocations.

LAW. Section 213. . . . (a) . . . . includes gains, profits, and income derived from salaries, wages, or compensation for personal service (including in the case of the President of the United States, the judges of the Supreme and inferior courts of the United States, and all other officers and employees, whether elected or appointed, of the United States, Alaska, Hawaii, or any political subdivision thereof, or the District of Columbia, the compensation received as such), of whatever kind and in whatever form paid, or from professions, vocations, . . .

Certain income, defined by section 209 as "earned," is taxed at a lower rate by the device of an "earned income credit." The definition of earned income and the computation of the earned income credit are covered in Chapter 8, "Credits Against the Tax."

Accounting Procedure

The methods which may be used in accounting for income are fully discussed in the preceding chapter (pages 239-275). Their application to the specific case of income from personal services will be briefly considered here.

Salaries and wages need not be accounted for in the return until payment is made and received. As to "constructive receipt," see page 252. If at all possible, however, the accrual system should be adopted, since no other method, strictly speaking, accurately reflects net income, except in the case of wage-earners who have no investments.

Receipt method.-If the taxpayer prefers to prepare his income tax return from his check book or cash book, no fault will be found, if the result clearly reflects his actual net income. In such cases, if the taxpayer's income arises from fees, etc., it is suggested that a cash book with several columns would be most useful. On the receipt side all items of receipts from fees, etc., should be entered in a column reserved for the particular purpose, so that at the end of the year the aggregate of such column will be the proper amount to include in the return.

The receipt method cannot be used if it serves to obscure the taxpayer's actual net income for the taxable period. Section 212 (b) defines “net income" and states that "if the method [of accounting] employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income."

The Commissioner has from time to time attempted to compel taxpayers reporting on the receipt basis to return income accrued on the books of the payers, but not actually received by, or available to, the taxpayer. These attempts have ordinarily been unsuccessful, as a few cases will show.

COMPENSATION CREDITED BUT NOT AVAILABLE IS NOT TAXABLE.In Englander's Appeal [1 B. T. A. 760 (A)] the taxpayer was president and general manager of a corporation. His salary was credited to his personal account and deducted as an expense in making federal income tax returns. He did not draw all the amounts credited and reported only the receipt of cash in his individual return. The Commissioner contended that the entire compensation credited was avail

able to him and taxable. The Board overruled the Commissioner since it appeared that the taxpayer had agreed not to draw all of his salary, if to do so would injure the corporation's credit, and that during the years in question it was heavily involved.

In Maisel's Appeal [2 B. T. A. 66 (A)] the taxpayer (who kept his accounts on a cash basis) was credited with commissions which were not made available to him until later. The Commissioner contended that he should report the amounts credited, but was overruled by the Board.

In Graydon's Appeal [2 B. T. A. 552 (A)] the taxpayer, who kept his accounts on a cash basis received stock for part of the compensation due him in cash. The stock was issued because the corporation could not pay the large amount due its creditors and to place it in a better banking position. The Commissioner ruled that the actual cash received in 1920 should be included in gross income and that the stock should be included in the 1921 return at its par value of $100. At the hearing the Commissioner contended that all salary for the year 1920 credited to the taxpayer on the books of the corporation was constructively received, and should be reported in his return for that year.

The Board overruled the Commissioner and said:

DECISION. The facts affecting the second issue are almost parallel to those in the Appeal of A. L. Englander, 1 B. T. A. 760, in which we held that the acceptance by an employee of no par value shares of stock in consideration for settlement of amounts credited to such employee on the books of the corporation for unpaid salary and for cash advanced to the corporation does not result in taxable income to the employee unless such shares have been converted into cash or have a readily realizable market value. That decision is decisive of this appeal.

To the same effect is Hopkins' Appeal [2 B. T. A. 549 (A)]. In Greenbaum's Appeal [2 B. T. A. 979 (A)] the taxpayer was an officer and principal stockholder of a corporation. In 1919 the corporation credited his account with $3,000 as salary and deducted it as an expense. The taxpayer who kept his accounts on a cash basis, did not receive the salary during 1919. The Commissioner contended that it was income for 1919, and was overruled by the Board. It would appear from the facts found by the Board that the money was available. What would the Board decide if the taxpayer never drew the salary, but was allowed interest on the amount to his credit?