on the basis of profits realized from their sale and use during years following 1913, but we are constrained to hold, in the present state of the record of this appeal, which shows no segregation of profits ascribable to the duplicating machine patents as distinguished from profits of other businesses, that we are unable to determine what value should be ascribed to those patents and, therefore, what deduction should be allowed on account of their gradual exhaustion.

The determination of this appeal is not to be taken as closing the door to any presentation of facts which will support a definite finding of patent values as a basis for an exhaustion deduction applicable to any annual tax period following the year 1920.

In Wright's Appeal [1 B. T. A. 1260 (A)] the taxpayer produced general facts regarding values when stock was issued for patents, and regarding earnings as bearing on March 1, 1913 value, but failed to convince the Board that specific values could be determined.

The Board is hardly as liberal as the courts in such cases. Taxpayers, therefore, should present too much rather than too little testimony.

PATENT APPLICATIONS PENDING AT MARCH 1, 1913, MAY BE VALUED. The Committee on Appeals and Review in one case decided that a patent application has "no rights in the nature of property." (C. B. I-2, 122; A. R. R. 1086.)

In the case of Keystone Type Foundry v. Fastpress Co. (263 Fed. 99) District Judge Learned Hand, after citing as his authority Gayler v. Wilder (51 U. S. 477), said:

It must be taken as law that an inventor has property which he may assign prior to patent, at least when application is pending and the patent is specifically described."

It has been repeatedly held that a patent application may be assigned. In a carefully prepared opinion reviewing the authorities, Judge Haight in the case of Individual Drinking Cup Co. v. OsmunCook Co. (220 Fed. 335) held that an assignment executed pending application, passes the full legal and equitable title of the assignor to the assignee.

If, then, an application for a patent, pending March 1, 1913, was property capable of assignment, the value on that date should be the basis for computing deductions for depreciation as soon as the patent is granted. (See Chapter 36.)

A. R. R. 1086 is contrary to an earlier decision of the Com

'This case was overruled on other grounds in 272 Fed. 242.

mittee wherein a patent application is treated as property for invested capital purposes. (C. B. 3, 342; A. R. R. 328.)

In Individual Towel & Cabinet Service Co.'s Appeal [5 B. T. A. 158] the Commissioner held that certain patents and patent applications had no value on March 1, 1913. The Board overruled the Commissioner and allowed a considerable value. The main patent for which an application was pending on March 1, 1913, was issued October 19, 1915, from which date depreciation was computed.

Depreciation of patents.-The method of depreciation, when a patent was not issued until after March 1, 1913, necessarily differs from that applicable to patents issued prior to March 1, 1913, including applications pending at that date. (For a discussion of this point, see Chapter 36.)

Patent royalties subject to depreciation charges.-The following ruling explains the extent to which royalties subject to depreciation charges are taxable. (See Chapter 36 for a full discussion of the depreciation of patents.)

RULING. A invented certain apparatus and secured United States patents thereon. The patents were assigned to a foreign corporation under an agreement by which he retained 40 per cent interest in profits therefrom. Legal title to the patents passed to the company subject to the agreement mentioned. A's interest was recognized by the company and by the United States licensees under the patents. The committee is of the opinion that the agreement should be recognized as giving A a depreciable interest in the patents.

The value of each patent as at March 1, 1913, should be segregated and the depreciation allowable thereon determined on the basis of its own life instead of using as a basis the average life of all the patents and the value of all the patents in bulk. Of the total depreciation allowable for any year, 60 per cent is deductible in the return of the company and 40 per cent in A's return. (C. B. 2, 142; A. R. M. 35.)

All interest, except on state, municipal and certain United States securities, is to be included in gross income, whether on notes, bank deposits, bonds, mortgages or deeds of trust or other similar obligations of domestic corporations and insurance companies, bonds issued in foreign countries or upon foreign mortgages or like obligations (even though not payable in the United States).

Interest on tax-exempt securities is not to be reported as a part of gross income. A statement showing the number and amount of such securities and the income is required to be submitted with the annual income tax return.

Subject to the exceptions stated, not only is all interest received by residents and domestic corporations taxable, but interest received by non-resident aliens and foreign corporations from sources within this country1 is also taxable-a fact which raises an interesting question of international double taxation.2

The law and procedure regarding interest derived from United States obligations, including securities issued under the Federal Farm Loan Act, will be found in Chapter 24. Interest from all other sources is discussed in this chapter.

See Chapter 41.

1 As defined in section 217 (a-1). For discussion of the principles involved in the taxation of non-resident aliens, see Chapter 41.

Interest subject to tax.

LAW. Section 213. For the purposes of this title, . . . . (a) The term "gross income" includes gains, profits, and income derived from . . . . interest, . . . .

In order to exclude all exempt interest from taxation, taxpayers, particularly banks and other financial institutions, should keep separate ledger accounts for interest from various sources.

Interest due but not collected.—

REGULATION. When interest coupons have matured and are payable, but have not been cashed, such interest, though not collected when due and payable, is nevertheless available to the taxpayer and should therefore be included in his gross income for the year during which the coupons matured. This is true if the coupons are exchanged for other property instead of eventually being cashed. Defaulted coupons are income for the year in which paid. .. (Art. 52.)

Owners of bonds should not accrue the interest until there is a reasonable chance of collecting it. Of course, if the taxpayer could collect, but does not, there is no excuse for not reporting the amount accrued.

The mere accrual of the interest on the obligor's books, when its financial condition was such that payment of the interest was improbable, does not make the interest income to the bond holders. (C. B. IV-1, 131; S. R. 1363.)

ACCRUED INTEREST RETURNED AS INCOME WHICH IS NOT SUBSEQUENTLY COLLECTED.-Taxpayers reporting upon the accrual basis should report as taxable income accruals from bonds, real estate mortgages, loans and other obligations when there is a reasonable expectation that such interest will be received in due course. If it . develops that the debtor is unable to pay the interest previously entered as income, it should be charged off on the taxpayer's books as a bad debt as soon as it is known to be worthless.

In a ruling under the 1918 law, the Treasury held that a taxpayer could not be permitted to change from an accrual to a cash basis in accounting for interest when such interest was in part uncollectible, but must seek relief by charging off such items as bad debts. (C. B. I-1, 52; A. R. R. 737.)

Defaulted interest paid in reorganization securities.-A. corporation in financial difficulties had bonds outstanding upon which

the interest had not been paid for a number of years. A reorganization committee formed a new corporation for the purpose of acquiring the assets of the defaulting corporation. A taxpayer exchanged bonds of the face value of 5x dollars and upon which interest of dollars was unpaid for preferred stock of the new corporation of the par value of 6x dollars. The Treasury held under the 1924 Law that x dollars of the par value of the stock was received as a payment of interest and hence that the fair market value of onesixth of the stock received was taxable. (C. B. V-1, 10; I. T. 2258.)

Bank discount as interest.—

RULING.

On the cash receipts and disbursements basis bank discount on noninterest-bearing loans is income to the bank at the time the note or mortgage is paid. Under the accrual system the income to be reported for each taxable year from such discount is the amount earned during that year on all such loans held by the bank. (C. B. IV-2, 32; S. M. 3820.)

Discount or interest on obligations purchased below par.

RULING. No income from discount on loans purchased by the bank at less than face value after the loans are made is to be reported under either the cash receipts and disbursements or the accrual method of accounting until the payment of all or a portion of the loan or a resale.

If the loan purchased is noninterest-bearing, the treatment would follow the rules already laid down in the case of bank discount. If there are partial payments of such loans, any discount already reported under the accrual method as income would be excluded in computing discount returnable as income at the time of such payment. (C. B. IV-2, 32; S. M. 3820.)

This distinguishes between interest-bearing and non-interest bearing obligations purchased at a discount. In the former case the interest (under the accrual basis) is taken up as income as it accrues and in the latter case discount is not taken up until actually collected. This accords with the accounting principle that interest must be accrued (if collected) but profits need not be, even though they are equally collectible. In other words the interest is no more collectible than the principal, but interest is accrued and gains are not.

The ruling, however, is not consistent in the second point. When non-interest bearing obligations are purchased at a considerable discount the same two elements are found as in interest bearing obligations and the treatment should be uniform. In the former case by accruing all of the discount the entire gain is anticipated. This is not objectionable from an accounting point of view, but it is doubtful