tributes to the farmer's income for 1918. And the same with all other products that can be held for marketing with the prospect of or hope for more favorable prices.

47.-RENTS IN CROP SHARES.

Likewise, rents received in crop-shares are to be included in the return of income for the year in which such crop-shares are reduced to money or a money equivalent.

For example: A entered into a contract with B by the terms of which B agreed to produce during the year 1915 a crop of barley on A's land and deliver to A a third of the barley in sack, as rent. B sold his two-thirds share of the barley immediately after harvest; A held his one-third share until the following spring and then sold it. B should have returned the proceeds of his share as income for the year 1915 and A the proceeds of his share as income for the year 1916, notwithstanding that the barley was all produced at the same. time.

48.-COST OF CROPS.

But, while the proceeds from the sale of farm products should be included in the return of income for the year in which sold, the cost of production is allowable as a deduction for expense in the return for the year in which incurred. In other words, the cost of operating a farm during the year 1917 should be deducted as expense in the return for 1917, even though the crop produced is held for sale beyond the end of the year 1917.

49.--COST OF LIVESTOCK.

When livestock is purchased for resale by a farmer, its cost is an allowable deduction as an item of expense of operation; but when livestock is purchased for breeding or working purposes, the cost is not an allowable deduction as an expense in the farmer's return of income. In the latter case the expenditure is regarded as an investment of capital.

For example: A buys a number of calves and steers to feed and fatten for market, and the cost of the stock can be deducted by him as an item of expense. But when A buys a number of cows and mares for breeding purposes, and a work team of mules, his expenditure for them cannot be deducted in his return.

50.-LOSS OF LIVESTOCK.

Where livestock has been purchased by the farmer for any purpose and later dies from disease or injury, or is killed by order of

public authorities, the cost can be deducted as a loss by the farmer in his return of income, provided (in the case of animals purchased for marketing) the cost has not already been deducted as an item of expense, and less (in the case of animals purchased for breeding and working purposes) any amount claimed as a deduction on account of depreciation.

If a farmer, who has deducted as a loss the cost of animals killed by order of public authorities, is later reimbursed by the State, or the United States, in whole or in part, on account of stock killed, he is required to report the amount of such reimbursement as income for the year in which received. The same rule also holds true with respect to reimbursement for other property destroyed, when deduction has been claimed as a loss on account of such destruction.

51.-COST OF FARM EQUIPMENT.

The cost of farm machinery is not an allowable deduction as an item of expense. Such an expenditure is regarded as a capital invest

ment.

However, the cost of the ordinary tools used on the farm is regarded as an item of expense and may be so deducted.

By farm machinery is meant such equipment as wagons, harvesters, mowers, tractors, and the like.

By farm tools are meant articles such as axes, shovels, simple plows and harrows and similar equipment.

52.-DEPRECIATION ON THE FARM.

The farmer may in his return of income, also claim as a deduction on account of the exhaustion, wear and tear of his property, arising out of its use in his business, a reasonable allowance for depreciation.

This applies to farm buildings (other than a dwelling on the farm occupied by the owner). It can be claimed on all buildings and structures used in connection with the business of farming-barns, sheds, fences, drying-sheds, quarters of employees and the like.

It applies also to farm machinery and to livestock purchased for breeding and working purposes.

It does not apply to livestock purchased for resale, the cost of which can be deducted as an item of expense.

53. EXCEPTIONS TO GENERAL RULES.

In general, the rules, given above are to be followed by the farmer. However, there is a provision in the Income Tax law (Subdivision G of Section 8) which allows an individual keeping accounts

upon any basis other than that of actual receipts and disbursements to make his return upon the basis upon which his accounts are kept, provided his method reflects his income. Hence, the farmer, who keeps books, according to some approved method of accounting, which clearly show his net income for the year, may prepare his return from his books, even though his system may not follow strictly the rules outlined hereinbefore.

In the event, however, that a farmer departs from the rules and follows his own system, he must have his accounts in condition for examination by field officers of the Internal Revenue Service.

54.-FARMING FOR FUN.

The rules hereinbefore explained are applicable to farming as a business, for profit. A person who cultivates a farm for recreation or pleasure, and not according to the principles of commercial farming, is not regarded as a "farmer." The result, in his case, is generally a loss from year to year, and, if the expenses of cultivation are in excess of the receipts from the farm, the entire venture may be ignored in the preparation of his return of income. The receipts need not be included in his return and the expenses of cultivation, being regarded as personal expenditures for pleasure, cannot be deducted from income derived from other sources.

55.-INCOME DERIVED FROM GIFT.

While the law provides that "the value of property acquired by gift, bequest, devise, or descent," is not income subject to tax, it must be clearly understood that any gains or profits derived from such property, after the property has been thus acquired, are subject to tax. For example: A inherits industrial bonds valued at $100,000 paying interest at the rate of 6 per cent per annum. The value of the bonds is not taxable income to A but the interest received by A after his acquisition of the bonds must be returned by him.

56. PENSIONS.

Pensions paid by the United States Government are subject to the income tax.

Likewise pensions paid by private corporations to retired employees are subject to tax if the person receiving them has sufficient income, including the amount thus received, to make him liable. 57.-INCOME FROM PARTNERSHIP.

While a partnership is not subject to income tax, each individual partner is required to include in his personal return as a part of his

gross income his share of the net earnings of the partnership. However, the members of a partnership which deals in State, municipal or other similar bonds, the interest on which is not subject to income. tax, can exclude from their distributive interests in the partnership's earnings their proportionate shares of the interest received by the partnership on all such bonds.

58.-INCOME FROM EXPORT BUSINESS.

It has now been determined that income derived from an export business is clearly subject to tax. Legal attack was made on the requirement that income from such business be returned for taxation, the contention being that such an interpretation of the law was unconstitutional on the ground that to tax the income from export business is to tax the articles exported. In the case of Wm. E. Peck & Co. vs. John Z. Lowe Jr., collector (234 Fed. 125) decision is given in favor of the Government, and the income from such business is subject to tax.

59.-ROYALTIES, PATENTS, COPYRIGHTS.

A payment in the form of a royalty on a patent is returnable by its recipient.

A payment in absolute purchase of a patent right, as a result of which title to the patent passes, is returnable by the recipient as income to the amount by which such payment exceeds the aggregate amount expended in perfecting the invention and obtaining the patent.

Quite similarly would be treated income derived in the form of royalties on publications or from the disposition of a copyright.

The consideration of royalties from mines and oil and gas wells will be taken up in connection with the treatment of income from natural deposits in the earth.

60.-MATURED BUILDING AND LOAN SHARES.

When a certificate in a Building and Loan Association is matured and payment on account of such maturity is made by the association to the holder of the certificate, if the amount paid is in excess of the aggregate of the deposits made by the holder of the certificate to bring the certificate to maturity, the amount of such excess should be returned by the certificate holder for the year during which the certificate is matured.

61.-TAXABLE INSURANCE INCOME.

While the law exempts from tax the proceeds of life insurance policies paid to individual beneficiaries upon the death of the insured,

and the amount received by the insured, as a return of premiums paid by him under a life insurance endowment, or annuity contract, either during the term or at the maturity of the term mentioned in the contract or upon the surrender of the contract, still there are certain gains from insurance policies or contracts that are regarded as taxable income.

When the amount paid to the insured under a life insurance, endowment, or annuity contract, either upon the maturity or surrender of the contract, exceeds the sum paid by the insured pursuant to the contract, the amount of the excess is held to be income subject to tax and should be returned by its recipient.

Also dividends received by the insured from a paid-up policy are held taxable income to the insured and must be treated the same as dividends from a corporation's earnings in his individual return of income.