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forward to 1925 is to be deducted in accordance with subdivisions (c) and (d) of section 206 of the 1926 law, which have been discussed in the foregoing pages.

Section 206 (e) quoted above provides that a net loss for 1923 (computed under the 1921 law) shall be allowed "to the same extent" and "in the same manner" as a "net loss" is allowed as a deduction, under the 1926 law, for the two succeeding years. Under section 204 of the 1921 law an individual taxpayer (as well as a corporation) was permitted to deduct capital net losses, sustained in trade or business, in computing statutory "net loss." Under section 206 (a-2) of the 1924 and 1926 laws such deductions are not allowed to an individual in computing statutory "net loss." If the "net loss" of an individual for 1923 includes capital net losses, and such "net loss" for 1923 can be carried forward only "to the same extent" as a "net loss" is deductible under the 1924 and 1926 laws, the question arises as to whether such capital net loss included in the statutory "net loss" for 1923 can be carried forward to 1924 or 1925, since under the 1924 and 1926 laws such capital net loss is not allowed as a deduction in computing statutory "net loss."

It is not entirely clear from section 206 (e) that Congress intended to prevent, in the case of an individual, the carrying forward to 1924 and 1925 of a capital net loss, sustained in trade or business and therefore included in a statutory "net loss" for 1923. measure such a limitation would be breaking faith with taxpayers. In the absence of any prohibition in the law or regulations, the doubt should be resolved in favor of the taxpayer.

Administrative Provisions-Capital Gains

Special information to be included in returns.—

REGULATION. Segregation of transactions for the purposes of section 208 (b) is required only where the taxpayer elects to be taxed under that subdivision. (See article 1651.) When a taxpayer elects to be taxed under section 208 (b) for any taxable year, he must attach to his return of income for such year an accurate statement under oath showing all items of capital gain, capital loss, and capital deductions in such manner as will clearly show the exact amount of his capital net gain for the taxable year. Each transaction must be separately shown and the capital items with respect thereto grouped together in order that the capital gain derived or the capital loss sustained from each capital transaction will readily appear. In the case of sales or exchanges of securities or any 'other property, the statement must show how long the property was held by the taxpayer immediately preceding the sale or exchange. (Art. 1652.)

Collection and payment.

LAW. Section 208.

divisions (b) 13 or (c)

. . . . (d) The total tax determined under subshall be collected and paid in the same manner,

at the same time, and subject to the same provisions of law, including penalties, as other taxes under this title.

"See page 563. "See page 566.

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Income from royalties and similar sources is not specifically named in the definition of income in the law, but it is clearly included within the following general clause:

LAW. Section 213.

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(a) The term "gross income" includes gains, profits, ... and income derived from any source what

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The law provides that the profit which arises from the sale of patents and copyrights must be included as income for the year in which it is received. It has been pointed out on many occasions that this procedure works an unwarranted hardship on inventors and others who have spent considerable time and money in the development of ideas or devices, only to find that on selling them the whole of the increased value must be returned for tax purposes in a single year. It is admitted that a distribution of the increment over the development period would be extremely difficult, but the injustice of the present procedure warrants special treatment. Since 1922 the "capital net gain" provision of the law 1 has limited the tax payable to 122 per cent of the profit, if the patent or copyright has been held for at least two years. (See further, page 563 et

seq.)

1 Section 206, 1921 act; and section 208, 1924 and 1926 acts.

Royalties from Mines, Oil Wells, etc.

Royalties from mines, oil wells, etc., must be accounted for in the year in which they are received by the original recipient. If they are afterwards transferred to another as the result of litigation, the tax originally paid thereon will be adjusted if a claim for credit or refund is filed.

RULINGS. Income from oil royalties must be returned in the taxable year received, even though the title to the producing land is in litigation. If any part of the royalty income is ordered by the court to be paid over to another, any tax previously paid thereon will be credited against any income tax then due under any other return of the taxpayer, and any balance of the excess tax paid will be refunded if proper claim for such refund is made. (C. B. 4, 95; O. D. 825.)

This ruling was later explained as follows:

In the case of a dispute as to the title of oil-producing land, the royalties belong to the true owner. They follow the land and come into existence regardless of the person or activities of the owner. If one collects the royalties thinking he is the owner and then by judgment of court finds that another is the owner, he must surrender the royalties received not as damages but simply because they belong, and belonged from the beginning to the true owner. The one who first received the royalty did so because he thought the land, and therefore, the royalties were his.

Where a patentee obtains a judgment against the infringer of a patent by virtue of which the infringer must account for all profits made through the infringement, the situation is materially different." (C. B. 5, 134; O. D. 1141.)

....

In the foregoing case the royalties were paid to one who claimed to be the owner of the lands. The obligation to report was clear. In the following case the lessee withheld the payments. It is not likely that the claimant, eventually successful, would have been reporting the income on an accrual basis. Nevertheless, when determined the claimant should be permitted to file amended returns. The only equitable tax is that which would accrue from year to year under the laws in force during those years. Otherwise under the graduated rates in force in the year of realization the government might take several times as much tax as would justly be due. The taxpayer's failure to report would be due to no fault of his and he should not be penalized. The commissioner has the power to, and should, accept amended returns.

2 For remainder of ruling, see page 579.

RULING. The taxpayer leased oil land to a corporation under a royalty agreement. The title of the lessor to the land is in litigation and, pending the settlement of the litigation, payment of royalty is being withheld by the lessee. Inquiry is made by the lessor as to the proper treatment for income-tax purposes of the royalties so withheld.

Held, that inasmuch as the taxpayer's right to the royalties is in dispute, it not being certain he would ever receive them, and since if the royalties are rightfully his they will not be available to him until the litigation is finally determined, such royalties withheld by the lessee are not to be included in income for the years in which they would otherwise have been payable, but should be reported as income for the year in which the litigation in question is finally disposed of or the lessor's right to the royalties is established in some other way. (C. B. I-1, 90; I. T. 1212.)

Royalties subject to depletion charges.-The owner of a mine, an oil well or other similar property operated on a royalty basis must return as income his royalties received, but he is permitted to deduct expenses and to charge against the royalties received (or accrued, if taxpayer reports on accrual basis) depletion allowances determined under section 204 (c-1) and (c-2). For a full discussion of the topic of depletion as an allowable deduction, consult Chapter 38.

After the "basis" for depletion is determined, a proper calculation must be made as to how much of the royalties received is capital and how much is income. The part which is capital is not taxable, but all royalties which accrue must be reported as gross income and the depletion allowance deducted in order to ascertain the taxable or net income.

In the Manual for the Oil and Gas Industry (revised August, 1921) the Treasury states (page 31) that “if a certain proportionate part of a lessee's capital returnable through depletion deductions is deducted in a given year the same proportion of the lessor's capital sum returnable through depletion will be deducted." No general rule can deprive the lessor or lessee of the right to a depletion allowance which will return his capital free of tax.

In one case (C. B. 3, 89; O. D. 644) it was stated that "the oil and gas rights had no market value at the time the land was purchased," and that in consequence "the entire amount received from the sale of the royalty interests is income for the year of its receipt, subject, however, to proper adjustment on account of depletion sustained."

The ruling is inconsistent. It first states there is no capital

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