III SALES AND EXCHANGES: GENERAL RULES INTANGIBLES SECURITIES ISSUED Income from sales and exchanges-general. Sales of intangibles (patents, copyrights, franchises, good-will, and so forth). Rules for proving March 1, 1923, values of intangibles. Sales or purchases by a corporation of its own stocks or bonds. THE general rule applicable to sales and transfers of property is that taxable income is realized where the fair value of the property received exceeds the cost (decreased by depreciation which has constituted or would have constituted (A. R. R. 3515) an allowable deduction in past years) or March 1, 1913, value if the property was acquired prior to that date. A new significance was given March 1, 1913, valuations during 1921 by the decision of the Supreme Court in Goodrich v. Edwards, (225 U. S. 245). This rule governs the choice of cost or March 1, 1913, value and may be summarized as follows: Ascertain cost, March 1, 1913, value, and selling price; subtract from the selling price that one of the three values which falls in amount between the other two. The result is the taxable profit or deductible loss, if any. Applied to specific cases, six possibilities arise: The reason for this theory is that any diminution or in crement of value prior to March 1, 1913, as compared with cost cannot be taxed nor can it be claimed as an allowable deduction. In each instance hereafter, where "cost or March 1, 1913, value" is referred to, it will be understood that the rule, outlined above, will apply (Sec. 202 (b) and Art. 1561). March 1, 1913, value was introduced for the first time in the 1916 act. Between 1913 and 1916, therefore, the profit or loss on sales and exchanges was always measured by cost and selling price. Under the 1909 law January 1, 1909, was given a significance equal to March 1, 1913, under the 1916 and subsequent acts. Profits from cash sales may be readily ascertained and equitably taxed. But when property of the same or another kind is received in exchange the assessment of a cash tax thereon does not in all cases seem justifiable. Commencing with the 1918 act there has arisen the theory of the "continuing transaction" or "uncompleted sale" under which rules, more or less complicated, have been formulated so that taxpayers have been relieved, in part at least, from the burden of having to pay cash taxes on transactions from which no cash was realized. Non-cash or partially non-cash sales, lack of ascertainable sales value, and application to similar uses seem to warrant regarding the property received in exchange merely as taking the place of the old. But it must not be thought that the taxpayer thereby escapes all possible tax; if he sells his new property for cash, the amount received, less the cost of the property previously given in exchange, becomes taxable income. A. R. M. 106 introduced the principle that in connection with invested capital2 the Income Tax Unit was not justified 1 Properly, there are two sorts of transactions falling under this classification: (1) transactions in which the property received in exchange is to be put to the same use as the property given in exchange, and (2) transactions the profits from which are difficult or impossible of satisfactory computation. In the first case there has been no real conversion, and in the second, no equitable rule can be devised. 2 Se page 187.. |