Since January 1, 1922, the maximum rate of tax upon net capital gains has been 122 per cent. (For computations, etc., see page 563 et seq.)

LAW. Section 208. (a) For the purposes of this title

(1) The term “capital gain" means taxable gain from the sale or exchange of capital assets consummated after December 31, 1921;

(2) The term "capital loss" means deductible loss resulting from the sale or exchange of capital assets;

(3) The term "capital deductions" means such deductions as are allowed by section 214 for the purpose of computing net income, and are properly allocable to or chargeable against capital assets sold or exchanged during the taxable year; . . . .

When should capital gains tax be claimed?-A's entire net income of $66,000 is capital gain; he is married, and has no depend

ents. His tax computed in the ordinary way would be $8,285. At the capital gains rate of 121⁄2 per cent it would be $8,250. The surtax on income in the bracket between $64,000 and $70,000 is 17 per cent. It is misleading to compute the benefit of the capital gains rate of 121⁄2 per cent by reference to any one surtax bracket. Other factors must be considered such as income and deductions other than capital items. The tax should then be computed separately on the two bases and the smaller of the two selected.

The benefit of the capital gains tax may be claimed at any time before the statutory period of limitations expires. In Hoey's Appeal (4 B. T. A. 1043) the taxpayer had failed to report the sale of his business on the theory that the sale price had not exceeded March 1, 1913 value. The Commissioner held he had not exercised his election to report at the capital gains rate.

Corporations denied benefit of capital gains provisions.Corporations may not claim the benefit of the capital gains provisions. [Section 208 (b).] This was of no importance when the corporation rate was 121⁄2 per cent. Now that such rate has been increased to 132 per cent, there is a differential of 1 per cent in this respect in favor of the business conducted by an individual proprietor, partnership or trust.

Application of the Capital Gain and Loss Provisions

The determination of capital gains and capital losses depends upon the meaning of the term "capital assets."

Definition of the term "capital assets."

LAW. Section 208. (a) For the purposes of this title. ... (8) The term "capital assets" means property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business.

The two-year requirement.-The one change in the 1926 law regarding capital gains and losses extends the two-year holding to

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1 [Former Procedure] See Income Tax Procedure, 1926, page 928

cover every species of property which has been received in an exchange or by gift where the basis is deemed to be in whole or in part the same as before the exchange or gift. The new provision is much more liberal and follows the lines suggested by the author last year that if the property now held is considered, for income tax purposes, to have inherited the value history of other property, it is, for purposes of the capital gain provisions, considered to be the other property. This is true even though on an exchange in a reorganization "boot" is received which results in a recognition of gain to the extent of the "boot."

If the exchange is only partially "closed," then the two-year holding of the property now held is related back to the property exchanged.

IN CASE OF "CONTINUING TRANSACTION," WITH OR WITHOUT "BOOT."

LAW. Section 208. (a) .... (8) . . . . In determining the period for which the taxpayer has held property received on an exchange there shall be included the period for which he held the property exchanged, if under the provisions of section 204 the property received has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as the property exchanged. . . . .

The foregoing has reference to the exchanges referred to in section 204 (a-6). The words "in whole or in part" which qualify the word "basis" cover the cases referred to in sections 203 and 204 as well when "boot" is received as when securities only are exchanged.

An individual engaged in the real estate business acquired land in 1923 for the purpose of resale. Later he conveyed the land to a corporation in consideration for a controlling interest in the stock of the latter. In 1925, more than two years after the land was acquired but less than two years after the taxpayer acquired the stock of the corporation, the taxpayer sold the stock. The General Counsel held (V-43-2943; G. C. M. 621) that the taxpayer was not entitled to the benefits of the capital gains section, because the land which was exchanged for the stock is not a capital asset within the meaning of section 208 (a-8).

DISTRIBUTION OF REORGANIZATION SECURITIES WITHOUT SURRENDER OF OLD SECURITIES.

LAW. Section 208. (a)

(8)

...

In determining the period for which the taxpayer has held stock or securities received upon a

distribution where no gain is recognized to the distributee under the provisions of subdivision (c) of section 203 of this Act or of the Revenue Act of 1924, there shall be included the period for which he held the stock or securities in the distributing corporation prior to the receipt of the stock or securities upon such distribution.

Section 203 (c) covers a particular case of distribution of securities only and without an exchange of the securities, which is quite common in reorganizations.

GIFTS AND TRANSFERS IN TRUST, AFTER DECEMBER 31, 1920.

...

LAW. Section 208. (a) .... (8) . . . . In determining the period for which the taxpayer has held property however acquired there shall be included the period for which such property was held by any other person, if under the provisions of section 204 such property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as it would have in the hands of such other person.

....

Gifts after December 31, 1920 take the same basis in the hands of the donee as in the hands of the donor. Similarly, transfers in trust after that date take the same basis as in the hands of the grantor. Since the property is in effect deemed not to have changed hands, it is only equitable that the two-year period should relate back to the original holding.

PROPERTY ACQUIRED BY INHERITANCE. Here the basis is not related back. (See page 467.)

RULING. . . . The particular question raised is whether the twoyear period during which capital assets must be held to entitle the taxpayer to the benefit of the provisions of section 206 of the Revenue Act of 1921 ran from the date of the testator's death or from the later date on which the beneficiary actually received possession of the securities. .... it is well settled that for the purpose of computing gain or loss from the sale by the beneficiary of property acquired by bequest, devise, or inheritance, the property is acquired by the beneficiary as of the date of the decedent's death. (Art. 1563, Reg. 62; L. O. 1012, C. B. 2, p. 34.) Hence, in the instant case, the taxpayer acquired the securities at the date of the decedent's death; and that particular investment has been kept intact as the taxpayer's from that date to the date of sale, a period of more than two years. The gain thereby realized represents an accumulation over a period of more than two years. In view of the indications within the section itself that a taxpayer possessing a beneficial interest in property may have the benefit of its provisions, and of the construction placed upon the section by the regulations and rulings, it is held that the taxpayer herein is entitled to compute his tax with reference to the gain on the sale of the

securities here in question on the basis provided in section 206. (C. B. III-1, 70; I. T. 1889.)

I. T. 1889 is in conflict with the decision of the Board of Tax Appeals, in Matthiessen's Appeal [2 B. T. A., 921 (NA)]. The Board held that an heir or legatee acquires property at the time it is actually delivered to him, not at the time of the death of his decedent. (See page 468.)

ESTATES.

RULING. The period during which a decedent owned property may not be added to that during which it was held by his estate in arriving at a holding for a period of two years in order that the estate may get the benefit of the capital net gain provisions of Section 206. (C. B. II-1, 37; I. T. 1638.)

TRANSFERS IN trust before DECEMBER 31, 1920.-The following ruling states the principle regarding trusts created prior to December 31, 1920.

RULING. The creator of a trust, either by will or deed, is regarded for the purpose of section 206 as entirely separate and distinct from the trustee who received securities under the trust instrument, and where securities sold by the trustee have not been held by him for a period of two years, the time during which such securities were held by the creator of the trust can not be added to the period during which they were held by the trustee in order to bring them within the two-year period required by section 206. (C. B. I-2, 41; I. T. 1379.)

WHEN STOCK IS ACQUIRED THROUGH RIGHTS.-Stock acquired by exercise of rights is considered to have been held for more than two years if the stock with respect to which the rights were issued was so held. (C. B. II-2, 45; I. T. 1786.)

IN CASE OF STOCK DIVIDENDS.—

REGULATION. If the taxpayer has held for more than two years stock upon which a stock dividend has been declared, both the original and dividend shares are considered to be capital assets. (Art. 1651.)

"Stock-in-trade" and other property specifically excepted.The law states that the term capital assets "does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer pri

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