ceived (Art. 51) and expenses deducted in the year accrued or paid (Art. III). In the case of income the test is the availability thereof, as illustrated more fully under "Constructive Receipt," on page 38. Judgments, for example, ordinarily give rise to income in the year rendered or otherwise definitely determinable. Losses not discovered until a later year may justify the preparation of an amended return of a prior year. A loss from embezzlement can be deducted only in the year of the occurrence, unless special permission from the Commissioner is obtained as described under "Losses" (Art. 146). Additions to a depositors' guaranty fund in the case of a bank are expenses only if a corresponding amount of funds is no longer an asset (Art 567).

1

Permission to change the accounting period was denied where request was made following the close of the period (T. D. 3044 and A. R. R. 391). If a change is authorized, it must be followed (Mim. 2738). The 30 days' notice required by the 1918 law referred to the due date of the return for the proposed new taxable year (T. B. R. 37). A new corporation does not need to secure permission to file on a fiscal year basis (O. D. 404). A sole proprietor could not report his business income on one basis and his remaining income on another (O. D. 491). In general, permission to change the accounting period should be accompanied by good business reasons (T. B. R. 37). An action to compel the acceptance of a calendar year basis was denied (T. D. 3500).

The accrual basis cannot be followed unless books of account are kept; hence if a partnership adopts the accrual method, a partner (O. D. 977) or other employee (O. D. 696) cannot, unless he keeps personal books. Deductions for notes, where the cash basis is followed, cannot be made until the year of payment, although the recipient must in any case report their fair value as income when he receives them (A. R. M. 201). Retroactive salary allowances after the books were closed were not allowed as a deduction (A. R. R. 493) until the year in which payment was made (A. R. R. 519); but in a later case, additional salaries for 1917, voted in February, 1918, were not deductible in either year, although the salaries for 1917 were nominal (A. R. R. 2658). The books could not be reopened to give 1 See Chapter XVI.

effect to the instalment sales basis for past years (I. T. 1190). On the other hand, where past methods of accounting have been improper, retroactive changes have been permitted and even required; thus, national and state banks which had charged off additions to furniture and fixtures as an expense were required to build up and keep supplemental records apart from the regular books of account so that they might be put on a proper accrual basis (A. R. R. 377 and A. R. M. 172). Adjustments of railroad accounts, ordered by the Interstate Commerce Commission, were required to be given retroactive effect to in amended returns (O. D. 9). Where accounts receivable resulting from sales are present, the accrual method must be followed (A. R. R. 217); if resulting from services, the amount of the bill being subject to clients' approval, as in the case of a law partnership, the cash basis was permitted (A. R. R. 702). Interest receivable, accrued in the past, must be continued even though the collection of such interest, because of changed trade conditions, is doubtful (A. R. R. 737). A taxpayer who as serted the receipts and the accrual methods resulted in the same income was not permitted to change his method of accounting (O. D. 1133), nor was permission granted when the change was made on the last day of the period (O. D. 1113).

Income not determined until a later year has usually been held to be income of that year; thus, an additional allowance in 1921 on a Government contract closed in 1918 was income for 1921 (A. R. R. 1835), damages from a patent infringement suit were income in the year judgment was rendered (I. T. 1294; S 1335), an amount received by a railroad for services rendered under the Federal Control Act constituted income in the year received (I. T. 1471, 1326); and the same rule applied to the additional compensation allowed railway mail carriers for prior years' services, the allowances given them being income in the year determined and credited to them and not in the year of performance or receipt (L. O. 1086), and to other income withheld by governmental authority (O. D. 1046, L. O. 1082). This rule apparently superseded the rule laid down in O. D. 229 and O. D. 816 which required amended returns after the determination of income. But amounts embezzled by an administrator and later partly recovered were allocated in reduction of the loss to the estate of each year in which the funds were embezzled (I. T. 1470).

Where contingent liabilities are set up on the books the right to deduct the expense in the year actually incurred is not prejudiced (O. D. 159). Additions to a reserve for claims covering

damages to freight and injuries to persons are not deductible (O. D. 879; A. R. R. 915; I. T. 1351), even though equal in amount to insurance premiums and paid to a trustee (I. T. 1797). Provisions for a cash discount reserve are deductible (I. T. 1348), and the method of accounting may be changed at the option of the taxpayer for 1923, providing the same method is held to consistently thereafter (I. T. 1710). A state bonus tax based on 1918 income, authority for the tax being contained in a law passed in 1919, could be deducted only when actually ascertained and only when it had become a liability to the taxpayer (T. D. 3330); and a retroactive surtax levied by a state was a deduction for the year accrued (O. D. 387 and 1118; I. T. 1498). Because the Wisconsin income tax is an offset against property taxes assessed in the following year, no definite liability exists until that year (A. R. R. 3656). Allowances for defective goods and rebates are proper deductions in the year determined or admitted (A. R. R. 155 and 921) and if in the process of settlement, are deductible even if the year closes before final settlement is made (A. R. R. 275). Similarly price reductions determinable in a later year cannot be called an expense of an earlier year (I. T. 1533), but if known and merely not paid until a later year should be accrued in the earlier year if the books are so kept (I. T. 1566). Contingent liabilities may exist in connection with completed and delivered goods manufactured under contract; but not until the liability is discovered can the loss be taken (I. T. 1731).

Losses from the cancellation of purchase contracts are typical of expenses which can be deducted only in the year incurred or made certain (S. 983); damages were deductible in the year awarded (S. 823 and O. D. 917); rent deferred at the option of the lessee could be deducted in the year accrued (O. D. 794); the award of an industrial commission could be deducted in toto in the year the award was made, even though payment was to be made on a weekly basis (I. T. 1263). Instalment sales expenses are deductible only in the year incurred or paid (A. R. R. 1216). A stock loss written off in 1918 could not be transferred to 1919 because bankruptcy proceedings were not completed until that year, when it was shown there was no recovery in 1919 (I. T. 1697).

Payments in acquiring leases should be amortized over the life of the lease, hence amounts designated as prepaid rent (I. T. 1291), a bonus paid prior to the securing of a lease (A. R. R. 676), and a bonus paid before a lease takes effect (O. D. 1013)

are deductible over the active life of the lease. The same reasoning was applied to the amount paid on a contract of a baseball player (O. D. 836). Discounts on purchased mortgages were to be spread in proportion to collections (I. T. 1650). But an amount paid in cancellation of a lease (O. D. 974) and commission on a long-term lease (I. T. 1171) were regarded as expenses of the year incurred. In another case, advertising expenses in connection with a national campaign could be deducted only in the year paid or accrued (O. D. 1039).

CONSTRUCTIVE RECEIPT

Income need not be actually received in order to be taxable. Bond coupons may be due October 15, but through negligence or other cause may not have been cashed until January of the following year. If the books are on a cash basis the unclipped and matured coupon would be income for the calendar year although not cashed during that year; if the books are on an accrual and calendar year basis the unclipped and matured coupon and the accrued interest between October 15 and December 31 would be included in the income calculation. There is thus a distinction between income accrued and income constructively received. If credited to the account of a taxpayer the income is not constructive unless at the same time it is unqualifiedly subject to withdrawal by him. "Subject to withdrawal" and "available" are the words frequently used by the Department in ruling that income has been constructively received.

Distributive interest of partnerships, personal service corporations (the latter after January 1, 1918, and before January 1, 1922), and estates and trusts, interest on savings accounts and other accumulating investments are examples cited in the regulations (Art. 51-3).

Income credited and made available and therefore taxable is illustrated by building and loan association profits credited to stockholders' accounts (O. D. 446) unless withdrawal is restricted as in the case of a cooperative bank where income on the withheld profits was taxable in the year the restriction was removed (O. D. 1081); profits, restricted or unrestricted, of a

partnership (O. 912); insurance premiums paid on the lives of officers and employees where the officers or employees designate the beneficiary (O. D. 659); sales commissions earned (A. R. R. 366); income paid by a debtor of a taxpayer to a third person for the account of a taxpayer (O. 912, I. T. 1339, Mim. 3040, A. R. R. 2245, A. R. R. 2954 and I. T. 1846); accumulating and unpaid interest on a trust fund (O. D. 1047) and on an account with a broker (I. T. 1764), but not on retirement deductions from the salary of an employee until he leaves the service (I. T. 1738); profits of a close corporation credited without restriction to stockholders' personal accounts (A. R. R. 1004); a portion of the selling price of bonds held in escrow as a guarantee of interest to be paid on the bonds (I. T. 1788). Similarly rentals paid by a subsidiary lessee corporation direct to the stockholders of the parent lessor corporation constituted income of the parent company (A. R. R. 589). Until an option to receive cash or stock from a partially liquidating corporation is exercised, no income need be reported (A. R. R. 375). The date a dividend is payable determines the period in which it is taxable (O. D. 97). Where a corporation loaned money without interest to stockholders whose stock was held as collateral, and no dividends were declared on such stock, dividends were nevertheless constructively received by the borrowing stockholders at each dividend declaration and interest was constructively received by the corporation in return, although no money passed (I. T. 1666).