the separation is in form and not in substance, income tax returns should be made only by the sole owner.

An English firm had an agency in the United States which purchased cotton in the United States and shipped it to England. The cotton was billed to the head office at market prices on the day of shipment. A book profit of several hundred thousand dollars was shown on the books kept in this country. No cotton was shipped to any one except the actual purchasers. Not a dollar of actual profit was realized in this country. A revenue agent held that a taxable profit was realized because it was shown on the books. The profit was a book profit only. No net income was realized. Upon appeal the agent was overruled.

Charging or crediting oneself at high or low prices cannot produce a profit or a loss. Dealing with the public is necessary to effect such a result.

Subsidy received by a railroad.-The Cuba Railroad Company built a railroad line, under an agreement with the Cuban government, to be operated at reduced tariffs. Under the agreement the Cuba Railroad was to receive $5,000 per kilometer in six annual installments. The subsidy was held to be nontaxable.

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Exchange memberships-proceeds of sale not taxable to exchange.—

RULING. . . . . The amount received as deposits from members appears to be no different than the amount received by a corporation from the sale of its capital stock. The purchaser of stock in a corporation can not demand the return of his money and expect to receive it, and neither can the holder of a membership certificate in the M Exchange. When a corporation liquidates, each stockholder is entitled to receive his proportionate share of capital and surplus, likewise upon dissolution of the exchange each member would be entitled to receive his proportionate share of the deposits and any additional sums that had been permitted to accumulate.

Held, that the amount received by the M Exchange from the sale of membership certificates should be treated as received by it in the form of capital, and the amount thereof should not be included in gross income. (C. B. I-1, 62; I. T. 1280, modified.) (C. B. I-2, 49, I. T. 1387.)

Gifts not taxable as income.-Gifts and their differentiation from income are dealt with in Chapters 12 and 13. A full discus

Cuba Railroad Company v. Edwards, 298 Fed. 664; affirmed, 268 U. S. 628.

sion of the taxability of gifts in the hands of donees appears in Chapter 20, Income Tax Procedure, 1926. The gift tax on donors under the 1924 law is discussed in Gift Tax Procedure, 1926.

GIFTS TO FRATERNAL AND BENEFICIAL ASSOCIATIONS ARE TAXABLE. It has been held under the 1918 law that payments by the Philadelphia & Reading Railroad Company to the Philadelphia & Reading Relief Association are not gifts but must be accounted for as income by the Association. "It is a purely business enterprise in which the Reading Company is participating." (Philadelphia & Reading Relief Association's Appeal, 4 B. T. A. 713.)

Forgiveness of indebtedness.—

REGULATION. The cancellation and forgiveness of indebtedness may amount to a payment of income, to a gift, or to a capital transaction, dependent upon the circumstances. If, for example, an individual performs services for a creditor, who in consideration thereof cancels the debt, income to that amount is realized by the debtor as compensation for his services. If, however, a creditor merely desires to benefit a debtor and without any consideration therefor cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the latter's gross income. If a shareholder in a corporation which is indebted to him gratuitously forgives the debt, the transaction amounts to a contribution to the capital of the corporation. (Art. 49.)

One of the United States circuit courts of appeals has decided that a debt forgiven is not income to the debtor. The court said:

DECISION. Now, it seems to us hardly arguable that the cancellation of the debt in question was not in the category of capital . . . . The cancellation of the debt was a means of contribution to its capital account, quite as though the money had been contributed by the stockholder only to enhance the value of his stock. (U. S. v. Oregon-Washington R. & Nav. Co., 251 Fed. 211.)

It is suggested that when stockholders or bondholders contemplate making good a deficit, attention should be given to both sides of the transaction. The creditor may desire to claim credit for the transaction as a bad debt deduction.

In Meyer's Appeal (3 B. T. A. 1319) the taxpayer was relieved from paying its creditors by their common consent. The Commissioner held that it constituted income and was overruled by the Board. The Board said:

DECISION. Its balance sheet will disclose a more favorable financial condition, but "enrichment through increase in value of capital investment

is not income in any proper meaning of the term." Eisner v. Macomber, supra. That the taxpayer received a benefit in the sense of being able to continue its business may be conceded, but such an opportunity can not constitute a gain or income, within the meaning of the Constitution and the Revenue Acts. It is not believed that relief from paying an obligation, under the circumstances set forth in this case, constitutes income, and it is our opinion that it is not taxable under the statute.

If the compromise had resulted from an adjudication in bankruptcy, even the Treasury holds that no taxable income arises." It is difficult to understand the Treasury's basis of differentiation.

In a case where one partner assumed an indebtedness to the partnership of another partner, it was held that the transaction represented a gift and did not result in taxable income to the debtor partner. (C. B. III-1, 109; I. T. 1982.) Also see Webb, Inc.'s Appeal (1 B. T. A. 269).

In another case, the taxpayer's uncle at his death left an interest in a partnership to a certain hospital, but with the provision that the interest in question could be purchased by the taxpayer for a certain sum. The taxpayer exercised this right, paying the prescribed amount by a note. At a later date the unpaid balance on the note was canceled by a smaller cash payment. It was held that no taxable gain was realized by the taxpayer, an adjustment only in the cost to him of the partnership interest being necessary. (C. B. IV-2, 36; I. T. 2195.)

Discharge of indebtedness for less than amount borrowed.In Bowers v. Kerbaugh-Empire Co. [70 L. Ed. 518 (Adv. Op.)] the Supreme Court affirmed the judgment of the district court holding that there was no income on the following facts. The taxpayer, an American corporation, borrowed money from a German bank, giving its note payable in marks. Subsequently its liability was discharged by payment to the Alien Property Custodian of an amount $684,456.18 less in dollars than the dollar value of the marks at the time the loans were made. Meanwhile the amounts borrowed had been lost in construction operations carried on by the taxpayer and its subsidiary. The Commissioner held the $684,456.18 to be income.

The Supreme Court held, as had the lower court, that this amount was not income. The decision on this point, however, is obscured by the court's conclusion that since the amount was lost, no tax should have been imposed in any case.

'C. B. II-1, 59; I. T. 1564; and C. B. III-1, 108; S. M. 1495.

DECISION. The transaction here in question did not result in gain from capital and labor, or from either of them, or in profit gained through the sale or conversion of capital. The essential facts set forth in the complaint are the loans in 1911, 1912, and 1913, the loss in 1913 to 1918 of the moneys borrowed, the excess of such losses over income by more than the item here in controversy, and payment in the equivalent of marks greatly depreciated in value. The result of the whole transaction was a loss.

Plaintiff in error insists that in substance and effect the transaction was a "short sale" of marks resulting in gain to defendant in error. But there is no similarity between what was done and such a venture. A short seller borrows what he sells, and the purchase price goes to the lender and is retained as security for repayment. The seller receives nothing until he repays the loan. Such a transaction would not meet the requirements of defendant in error. It needed the money for use and received the amount borrowed and expended it.

The contention that the item in question is cash gain disregards the fact that the borrowed money was lost, and that the excess of such loss over income was more than the amount borrowed. When the loans were made and notes given, the assets and liabilities of defendant in error were increased alike. The loss of the money borrowed wiped out the increase of assets, but the liability remained. The assets were further diminished by payment of the debt. The loss was less than it would have been if marks had not declined in value; but the mere diminution of loss is not gain, profit or income.

It is unfortunate that the opinion is not clearer. The transaction resulting in the loss arising out of construction contracts appears to be entirely different from the borrowing transaction. Suppose that the construction contracts had not resulted in a loss; would the Supreme Court hold that the $600,000 increase in the net worth of the company was not income? Or suppose the income of the taxpayer from other sources was $600,000; its construction losses were $600,000, and it repaid its loan with $600,000 less than it borrowed. Would the Supreme Court hold that the taxpayer had no taxable net income? Apparently the answer to both questions is "Yes."

Voluntary assessments paid by stockholders not taxable.

REGULATION. Where a corporation requires additional funds for conducting its business and obtains such needed money through voluntary pro rata payments by its shareholders, the amounts so received being credited to its surplus account or to a special capital account, such amounts will not be considered income, although there is no increase in the outstanding shares of stock of the corporation. The payments in such circumstances are in the nature of voluntary assessments upon, and represent an additional price paid for, the shares of stock held by the individual shareholders, and will be treated as an addition to and as a part of the operating capital of the company. . . . . (Art. 544.)

If the corporation is losing money and the stockholders are merely advancing funds with which to pay its debts or losses, it might be better to arrange the payments in the form of advances. Upon failure to repay, the advances could be charged off as bad debts.

Officers' salaries payable by a corporation but waived by the officers, were held to be an addition to the corporation's capital, not income. (C. B. 5, 277; O. D. 1034.) So also were contributions by stockholders of 70 per cent of their stock in a settlement with creditors. (C. B. I-1, 194; I. T. 1168.)

Taxes paid by vendee for vendor on profits from sale of property are income to vendor.8—An agreement to pay an additional sum to a vendor equal to the tax payable by him is an enforceable contract, but the calculation is a somewhat involved one. The amount payable must be sufficient to pay the tax on the profit plus such additional sum as will enable the vendor to pay the tax on the amount received in excess of the original sales price. The vendee would properly consider that the tax which is paid for the vendor is a part of the purchase price of the property.

Expenses paid for another company.-The capital stock of a terminal company was owned in equal parts by three railroads which acquired the terminal facilities for their mutual benefit and without the purpose of making profit therefrom. By contract between the company and the railroads, each of the latter paid for its use of the terminal and made up any deficit of the terminal company. It was held that the contributions by the railroad companies were part of the rentals paid for their use of the terminal facilities and were therefore income to the terminal company.10

Net proceeds of "business" life insurance are not income.Proceeds of "business" life insurance are not ordinarily income.11

REGULATION. . . . . The proceeds of a life insurance policy paid by reason of the death of the insured to any beneficiary (corporate or other'See Income Tax Procedure, 1922, page 521. Also C. B. 2, 62; A. R. M. 16.

*For computations, see Income Tax Procedure, 1921, pages 382, 383. Hamilton v. Kentucky and Indiana Terminal R. R. Co., 289 Fed. 20.

See also Houston Belt & Terminal Railway Co. v. U. S., 250 Fed. 1.

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[Former Procedure] See Income Tax Procedure, 1926, page 688.