than assets in kind; the amount thereof is computed by setting off against the fair value of the assets received the value of his interest in the partnership, which will be cost or March 1, 1913, value plus undistributed earned profits. March 1, 1913, value will not apply unless standing between cost and selling price. The March 1, 1913, factor should be determined as follows: to the fair value of the partner's interest at March 1, 1913, (based on offers therefor, capitalized income, or on the methods suggested on pages 47 and 48 for computing intangible valuations) should be added his share of undistributed earnings after that date on which the income tax has been paid (Art. 1570). The last clause seems scarcely justifiable; if some of the accumulated earnings of the partnership consisted of tax-free interest the omission of such interest from the total cumulated cost would result in taxing it when computing the income from the sale. Again, the earnings of some partnerships have been small and no taxes have been paid thereon. All income, however, is given the same minimum exemption, and it is the book value of the partner's account, with the possible adjustment of the March 1, 1913, value thereof, to which the department should look in ascertaining cost.

Cost will ordinarily be the partner's capital (and drawing) account, presuming that no appreciation in values or fictitious increase in good-will has been included therein.

If a retiring partner receives a distribution in kind no taxable profit arises until the assets are disposed of.

Reorganizations of partnerships offer difficulties in determining the value of partners' interests. The Department has set no rules but requires that the next return of income (an informational return is required from partnerships) be accompanied by the facts surrounding the reorganization in order that it may determine the taxable in

1 As used in the regulations, assets in kind apparently mean ordinary business assets, except cash. Marketable securities, purchased with the cash resulting from the liquidation and then distributed to the retiring owners, would doubtless not be regarded as assets in kind.

come, if any (Art. 1570). For comments on partnership reorganizations, see page 82.

When purchased by the partnership no profit arises in connection with a remaining partner's interest inasmuch as a purchase, and not a sale, has been made (S. O. 42).

INCOME OF A LIQUIDATING CORPORATION

No gain or loss is realized by a corporation in the distribution of its assets in kind despite the fact they may have depreciated or appreciated in value. But if its assets are sold and the cash or other property received in exchange is distributed to stockholders, the corporation must report the gain or loss in the usual manner (Art. 548). The receiver is responsible for the corporate return, covering a year or less, providing his jurisdiction extends over all the assets (Art. 424 and 622).

A liquidated corporation maintaining its existence merely to await the maturity of some of its investments was nevertheless required to report and pay a tax on its incidental income (0. D. 231). A receiver was held responsible for the return of income since the last tax return was rendered, no matter at what time his appointment was made (O. D. 73). An insolvent bank is not liable for income taxes, after it ceased to do business, although it must file a return, unless its assets exceed those necessary to pay off depositors (O. D. 114, based on Sec. 22 of the Act of March 1, 1879), and if it has erroneously paid taxes a certificate from the receiver will be regarded as sufficient evidence to authorize an abatement or refund (I. T. 1821); if the bank is in receivers' hands for any other cause, the tax accrues (O. D. 990). Where a corporation, owned by a partnership, was dissolved and the assets taken over by the partnership, the interest of each partner therein, less the cost of the interest, was held to be taxable income (I. T. 1323).

INVOLUNTARY CONVERSION

Involuntary conversion of an asset occurs where it is confiscated, as, for example, through condemnation proceed

ings, or where insurance or compensation is received following its destruction, in whole or part, or following its theft. If the property is not to be replaced, taxable profit may be realized through the receipt of insurance, compensation or damages following confiscation or destruction, the amount received corresponding to the selling price. If the property is to be replaced, replacement may be made immediately, by purchase of a similar asset, or by acquiring at least 80% of the stock of a corporation owning similar property, or through a replacement fund, the latter being an account to which the proceeds are credited and which should be made use of where replacement is contemplated but not within the taxable year. Permission to establish a replacement fund must be secured from the Commissioner, Form 1114 being availed of for this purpose. A bond is also required. If the proceeds from the involuntary conversion are equal to or less than the replacement cost no taxable profit need be reported. Should the replacement cost be less than the proceeds the taxable profit will be the same proportion of the book profit from conversion as the portion of the proceeds unused bears to the entire proceeds; likewise the cost of the new property for tax purpose (i. e., in order to establish a cost value in case the new property is sold) is obtained by applying to the cost or March 1, 1913, value of the original property the ratio obtained by dividing the proceeds spent for new property by the entire proceeds. Although provisions for a replacement fund are to be found in Regulations 45, no law prior to the 1921 act expressly permitted this partial taxation of profits. The new law applies the replacement fund provision retroactively over all other acts. It will be noted that the provision in the 1921 law taxes the profits ultimately if the new asset is sold (Art. 49, 261-3, 1567 (b) Sec. 202 (d) (2); 214 (a) (14) 234 (a) (12)).

Amounts expended in excess of insurance received are additions to the original asset value rather than expenses if the in

surance was, in turn, equal to or greater than the book value of the asset destroyed (O. D. 697 and A. R. M. 122).

Replacement involves the purchase of a similar asset; hence the payment of obligations on similar assets already owned was not a replacement (I. T. 1378), nor was a purchase represented in the acquisition of a similar asset from an affiliated corporation (A. R. M. 142). The purchase of only unimproved real estate was permitted where other real estate had been condemned; the cash received could be held for a reasonable length of time in the form of municipal bonds (I. T. 1617). Property restored by the Government, following the war, and accompanied by a cash indemnity was permitted to be credited, with the cash received, to a replacement fund (T. B. R. 41). The replacement of one vessel by another of somewhat larger capacity was held to be a replacement falling under this head (T. B. M. 61), as was also the replacement of one farm lost by the power of eminent domain by another (O. D. 513); on the other hand, the replacement of a tug by barges was not a replacement in kind (O. 914). Compensation for a portion of certain property condemned and for damages to a remaining property could be credited direct to the cost of the entire property (I. T. 1787). The redemption and retirement of the Victory 334's on June 15, 1922, was not an involuntary conversion (I. T. 1354).

An unused portion of a replacement fund set up in 1918 was subject to taxation at 1918 rates, although the replacement was made in 1920; hence, an amended return was required (Sol. Op. 135).

PROPERTY ACQUIRED BY GIFT, DEVISE, BEQUEST,

OR INHERITANCE

Under the 1918 act and previous acts gifts were valued, for the purpose of resale, at their fair value at the time of gift or at March 1, 1913, if acquired prior to that date. By provision in the 1921 law the cost or March 1, 1913, value to the last preceding owner by whom it was not acquired by gift governs in the case of gifts made after December 31, 1920 (Art. 73; 1562-1563). An attempt to tax gifts to the donor under the estate tax title was defeated in conference before the final passage of the 1921 act. In the act of 1894 gifts and inherited property were themselves

regarded as income but this point of view has not been held since except as to the income derived therefrom.

Property acquired by devise, bequest, or inheritance, including a material portion of a decedent's property acquired before but in contemplation of death, is valued at its fair market price or value at the time of acquisition which has been held to be value for Federal or state inheritance tax purposes (Art. 1563).

Property sold shortly after its gift has been regarded as a "colorable," i. e., not bona fide, gift and any profits arising from such sale are held taxable to the donor, and the penalty for fraud may also be assessed (S. 1022). Gifts as between husband and wife may not be set aside because of the failure to record the change in security ownership on the corporate records or because income was deposited in a joint account (A. R. R. 367). The cost of property held in a trust inter vivos is the cost to the donor (I. T. 1636). The value is that on the date receivable rather than the date actually received (O. D. 1136).

The basis of value of property acquired by a remainderman, in which he had a vested interest since devise was the value at date of death (O. D. 694 and Sol. Op. 35). The same rule attaches to the valuation of securities acquired through the termination of a trust created by a testator and the distribution of the corpus (I. T. 1165). If only a contingent interest exists the value to be taken in case of subsequent sale is that at the death of the life tenant (O. D. 727). The sale of an inheritance interest in the estate of a living person was considered income in its entirety (I. T. 1466).

A homestead was to be taken at its fair value at the date of entry plus improvement costs but not including the fee paid to the Government (O. D. 386), and may be taken only by the original entryman (O. D. 601); if entry was made prior to March 1, 1913, but patent thereafter obtained, the property could be regarded as having been acquired prior to that date (0. 880). A mineral grant was a purchase and not a gift (A. R. R. 2516).

To be subject to the limitations of the capital gain section gifts must be held more than two years even though acquired after 1920 (I. T. 1660).