Act of 1924. taxable status of the gain or loss upon such conversion, and increased in the amount of gain or decreased in the amount of loss to the taxpayer recognized upon such conversion under the law applicable to the year in which such conversion was made; (11) If substantially identical property was acquired after December 31, 1920, in place of stock or securities which were sold or disposed of and in respect of which loss was not allowed as a deduction under paragraph (5) of subdivision (a) of section 2146 or paragraph (4) of subdivision (a) of section 23447 of this Act or the Revenue Act of 1921, the basis in the case of the property so acquired shall be the basis in the case of the stock or securities so sold or disposed of, except that if the repurchase price was in excess of the sale price such basis shall be increased in the amount of the difference, or if the repurchase price was less than the sale price such basis shall be decreased in the amount of the difference. SEC. 204. (b) The basis for determining the gain or loss from the sale or other disposition of property acquired before March 1, 1913, shall be (A) the cost of such property (or, in the case of such property as is described in paragraph (1), (4), or (5) of subdivision (a), the basis as therein provided), or (B) the fair market value of such prop 46 Sec. 214 (a) (5), p. 94. SEC. 202. (b) The basis for SEC. 202. (a) (1) In the case ascertaining the gain derived or of property acquired before loss sustained from the sale or March 1, 1913, the fair market other disposition of property, price or value of such property real, personal, or mixed, ac-as of that date; and quired before March 1, 1913, shall be the same as that provided by subdivision (a); but (1) If its fair market price or value as of March 1, 1913, is in excess of such basis, the gain to 48 The gain derived from a single, isolated sale of personal property, which has appreciated in value during a series of years, is not capital but income. It is income regardless of whether the recipient be engaged in the business of buying and selling (such as a merchant, real estate agent, or broker) or merely holding it as an investment. The amount taxable under the Act of 1916, as amended by the Act of 1917, in the case of property acquired prior to March 1, 1913, is: (1) The difference between the selling price and the fair market value on March 1, 1913, when the fair market value on said date is greater than the cost thereof. Merchants' Loan & Trust Co. v. Smietanka (Ex-Col.), (1921) 255 U. S. 509; Eldorado Coal & M. Co. v. Mager (Col.), (1921) 255 U. S. 522; Goodrich v. Edwards (Col.), (1921) 255 U. S. 527. (2) The difference between the selling price and the cost thereof when the fair market It value on March 1, 1913, is less than the cost thereof. Goodrich v. Edwards (Col.), (1921) 255 U. S. 527. 49 The gain derived from a single, isolated sale of personal property, which has appreciated in value during a series of years, is not capital but income. is income regardless of whether the recipient be engaged in the business of buying and selling (such as a merchant, real estate agent, or broker) or merely holding it as an investment. The amount taxable under the Act of 1916, in the case of property acquired prior to March 1, 1913, is: (1) The difference between the selling price and the fair market value on March 1, 1913, when the fair market value on said date is greater than the cost thereof. Walsh (Col.) v. Brewster, (1921) 255 U. S. 536, reversing Id., (D. C., D. Conn. 1920) 268 Fed 207. (2) The difference between the selling price and the cost thereof when the fair market value on March 1, 1913, is less than the cost thereof. Walsh (Col.) v. Brewster, (1921) 255 U. S. 536. 50 (a) A taxpayer purchased securities prior to March 1, 1913. He sold them subsequent to said date for less than the cost. The fair market value thereof on March 1, 1913, was more than the cost. Under Sec. 202 (a) (1) of the Act of 1918, he was permitted to deduct as a loss the difference between the cost and the selling price and not the difference between the fair market value on March 1, 1913 and the selling price thereof. Ludington v. McCaughn (Col.), (D. C., E. D. Penn. 1923) 290 Fed. 604. 50 (b) Where property was acquired before March 1, 1913, at a cost which was less than its fair market value as of that date, and sold in 1919 at a price which was more than the cost but less than the fair market value thereof as of March 1, 1913, a deductible loss was sustained under the Act of 1918, equal to the difference between the selling price in 1919 and the fair market value thereof as of March 1, 1913. Flanner et al. v. U. S., (1924) 59 Ct. Cl. -; Vance v. McLaughlin, (Col.), (D. C., D. Calif. 1924) —Fed. and other like expressions convey the thought of the sum which can be obtained for property at a fair sale. This means market value. "The best market value test of the value of assets of a corporation is afforded by the price at which its stock sells. This, although the best practical test, is a poor one, because it is affected perhaps least of all by the value of what the corporation has viewed merely as property. This in the case of a young concern would ordinarily be a small percentage of its value as part of a profitable enterprise." Castner, Curran & Bullitt, Inc. v. Lederer (Col.), (D. C., E. D. Penn. 1921) 275 Fed. 221. 50 (d) Where there is a combination of two previously unaffiliated interests, the value placed upon the property by the parties and for which stock is issued to each, respectively, is evidence, as against the parties themselves, at least equally as convincing as other declarations of opinion made or procured subsequently, when the interests of the parties have shifted. Castner, Curran & Bullitt, Inc. v. Lederer (Col.), (D. C., E. D. Penn. 1921) 275 Fed. 221. be included in the gross income (2) If its fair market price or (3) If the amount realized therefor is more than such basis but not more than its fair March 1, 1913, or less than such SEC. 204. (c) The basis upon which depletion, exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the same as is provided in subdivision (a) or (b) for the purpose of deter-market price or value as of mining the gain or loss upon the sale or other disposition of such property, except that in the case of mines, oil and gas wells, discovered by the taxpayer after February 28, 1913, and not acquired as the result of purchase of a proven tract or lease, where the fair market value of the property is materially disproportionate to the cost, the basis for depletion shall be the fair market value of the property at the date of discovery or within thirty days thereafter; but such depletion allowance based on discovery value shall not exceed 50 per centum of the net income (computed without allowance for depletion) from the property upon which the discovery was made, except that in no case shall the depletion allowance be less than it would be if computed without reference to discovery value. Act of 1918. INVENTORIES. SEC. 203. That whenever in SEC. 203. That whenever in 51 Where property was acquired before March 1, 1913, and sold in 1917, it was proper for the purpose of determining loss or gain resulting from the sale thereof, to consider that the ratio of assessed value in 1917 to selling price was the same as the ratio of assessed value in 1913 to value on March 1, 1913, particularly where the value established thereby was corroborated by the testimony of real estate experts. Pitney v. Duffy (Ex.-Col.), (D. C., D. N. J. 1923) 291 Fed. 621. 52 (a) Now, what is the market price? What is the fair market price of the statute? We say 'fair,' since every word used by Congress must be given due effect in the construction of this widely applicable statute, for obviously, while a stock might be bought and sold and so marketed-and might thus be said to evidence some market price, yet it is obvious that Con gress by the addition of the words 'fair market price,' certainly meant that not only must the market price be ascertained by sales, but that sales so made, the circumstances under which they were made, the subjectmatter of the sales, all the attendant circumstances, were to be considered to determine whether such sales served to evidence not alone a market sale, but the fair price which Congress said should be the statutory start or base from which subsequent 'gain derived' should be determined. We start, then, with the fact that we are here dealing with the existence of a market, and a market price evidenced by sales in such market; so that our first and basic inquiry is whether there actually was a market for the sale of this insurance stock. Now, market implies the existence of supply and demand for without the existence of either factor no market value is shown. Standing alone, offers to sell Act of 1917. market price or value of such property as of March first, nineteen hundred and thirteen, shall be the basis for determining the amount of such gain derived. SEC. 5. (a) Fourth. [2] Provided, That for the purpose of ascertaining the loss sustained from the sale or other disposition of property, real, personal, or mixed, acquired before March first, nineteen hundred and thirteen, the fair market price or value of such property as of March first, nineteen hundred and thirteen, shall be the basis for determining the amount of such loss sustained; Act of 1916. value of such property as of March first, nineteen hundred and thirteen, shall be the basis for determining the amount of such gain derived. SEC. 5. (a) Fourth. [2] Provided, That for the purpose of ascertaining the loss sustained from the sale or other disposition of property, real, personal, or mixed, acquired before March first, nineteen hundred and thirteen, the fair market price or value of such property as of March first, nineteen hundred and thirteen, shall be the basis. for determining the amount of such loss sustained; Act of 1913. with no takers, or offers to buy with no sellers, show no such, concurring willing action of buyer and seller as is involved where a market is made by buyers and sellers, who by their respective sales and purchases make a market price which the law takes as evidence of value." Walter et al. v. Duffy (Col.), (C. C. A., Third Cir. 1923) 287 Fed. 41. 52 (b) The stock of the Prudential Insurance Company was held by a few families on March 1, 1913. A state law, enacted during the same month, provided for the mutualization of all insurance companies within the state, including the Prudential Company, and authorized a commission to value such stock for the purpose of mutualization. The commission duly made its report in 1915 fixing the value of the stock at $455 per share. Its intrinsic value in March, 1913 and in 1915, when the report was made, was the samę. There was evidence of sales over a period of years of from 600 to 700 shares of such stock, 488 shares of which were sold at forced sales, the price ranging from $205 to $260 per share. The total number of shares of the company outstanding was 40,000. No sales were made nearer than six months to March 1, 1913 and in the case of all sales it was necessary for brokers to spend from two to three months to get a buyer after an offer to sell was made. These sales were not evidence of "fair market price or value" on March 1, 1913. Under these circumstances an individual who owned Prudential stock on March 1, 1913, derived no taxable gain from the disposition thereof through mutualization in 1915, the value of the stock being the same on both dates. Walter et al. v. Duffy (Col.), (C. C. A., Third Cir, 1923) 287 Fed. 41. Act of 1921. Act of 1918. Act of 1924. opinion of the Commissioner the the opinion of the Commissioner the opinion of the Commissioner use of inventories is necessary the use of inventories is neces- the use of inventories is necesin order clearly to determine the sary in order clearly to deter-sary in order clearly to deterincome of any taxpayer, inven- mine the income of any tax-mine the income of any taxpaytories shall be taken by such tax-payer, inventories shall be taken er, inventories shall be taken by by such taxpayer upon such such taxpayer upon such basis basis as the Commissioner, with as the Commissioner, with the the approval of the Secretary, approval of the Secretary, may may prescribe as conforming as prescribe as conforming as nearnearly as may be to the best ac-ly as may be to the best accountcounting practice in the trade ing practice in the trade or busior business and as most clearly ness and as most clearly reflectreflecting the income. ing the income. payer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the in come. NET LOSSES. SEC. 206. (a) As used in this section the term "net loss" means the excess of the deductions allowed by section 21453 or 2345 over the gross income, with the following exceptions and limitations: (1) Deductions otherwise allowed by law not attributable to the operation of a trade or business regularly carried on by the taxpayer shall be allowed only to the extent of the amount of the gross income not derived from such trade or business; (2) In the case of a taxpayer other than a corporation, deductions for capital losses otherwise allowed by law shall be allowed only to the extent of the capital gains; tion shall not exceed the amount which would be allowable if computed without reference to discovery value; (4) The deduction provided for in paragraph (6) of subdivision (a) of section 234 of amounts received as dividends shall not be allowed; or ac SEC. 204. (a) That as used in SEC. 204. (a) That as used in this section the term "net loss" this section the term "net loss" means only net losses resulting refers only to net losses resulting from the operation of any trade from either (1) the operation of or business regularly carried on any business regularly carried by the taxpayer the taxpayer (including on by the taxpayer, or (2) the losses sustained from the sale or bona fide sale by the taxpayer other disposition of real estate, | of plant, buildings, machinery, machinery, and other capital as- equipment or other facilities, sets, used in the conduct of such constructed, installed trade or business); and when so quired by the taxpayer on or resulting means the excess of the after April 6, 1917, for the prodeductions allowed by section duction of articles contributing 214 53 or 234,54 as the case may to the prosecution of the present be, over the sum of the follow- war; ing: (1) the gross income of the taxpayer for the taxable year, (2) the amount by which the interest received free from taxation under this title exceeds so much of the interest paid or accrued within the taxable year on (3) The deduction for deple-indebtedness as is not permitted to be deducted by paragraph (2) of subdivision (a) of section 214 or by paragraph (2) of subdivision (a) of section 234, (3) the amount by which the deductible losses not sustained in such trade or business exceed the taxable gains or profits not derived from such trade or business, (4) amounts received as dividends and allowed as a deduction under paragraph (6) of subdivision (a) of section 234, and (5) so much of the depletion deduction allowed with respect to any mine, oil or gas well as is based upon discovery value in lieu of cost. (5) There shall be included in computing gross income the amount of interest received free from tax under this title, decreased by the amount of interest paid or accrued and losses sustained which is not allowed as a deduction by paragraph (2) of subdivision (a) of section 214 53 Sec. 214, p. 90. 54 Sec. 234, p. 190. and when so resulting means the excess of the deductions allowed by law (excluding in the case of corporations amounts allowed as a deduction under paragraph (6) of subdivision (a) of section 234) 55 over the sum of the gross income plus any interest received free from taxation both under this title and under Title III.50 55 Sec. 234 (a) (6), p. 198. |