the States, and not to the income derived from securities of private corporations conducting waterworks, irrigation projects, railroads, street railways, telephones, light plants, or other utilities. Also, when a municipality purchases a public utility subject to a mortgage, the mortgage retains its original character, even though the municipality pays the interest thereon. 37. Political Subdivisions. This term includes any special assessment district or division created by the proper authority of a state, acting within its constitutional powers, for the purpose of carrying out some public work which is a function of the State Government. This includes drainage districts, school districts, highway districts, etc. 38. Compensation of Public Employees. The compensation of all the present judges of the United States Courts, and all the officers and employees of a state or political subdivision thereof, are exempt from tax and need not be included in gross income. County employees, city policemen, state tax collectors, public school teachers, and others are exempt from taxation upon the salary received from the state or political subdivision, but are taxed upon income received from other sources. Mail clerks, postmasters, army officers, and other United States employees are taxed upon their salaried incomes. Pensions paid by the United States Government are not exempt. 39. Gifts. The value of property acquired by gift, bequest, devise, or descent is not included in income of individuals or corporations, but the income from such property must be included. A man who inherits a farm does not include the value of the farm, but all rents or other income received must be included. Where a will makes a gift of the income from an estate during a specified period to persons who are not the devisees of the principal of the estate, such persons are not taxed upon the amounts received. A corporation pays the salary of an employee, who was killed in the plant, to his widow for several months after his death; such payments, being purely gifts, do not constitute taxable income. 40. Proceeds of Insurance Policies. The money received by an individual from a life insurance policy, either at the death of the one insured, the maturity of the endowment, or the surrender of the policy, and money received as annuities is not income except where the payment is made to the insured himself, who has been paying the premiums. In this case all that he receives in excess of the amounts he has paid is income. Dividends on life insurance policies that have not matured are not income, but dividends on matured policies are income. 41. Proceeds of life insurance policies for benefit of corporations or partnerships are not exempt in so far as they represent profit, but are included in the income of the corporation or partnership to the extent that the amount received exceeds the premiums paid and not deducted in any Return of income as an expense of the business. Frequently, corporations insure the lives of their officers, paying the premiums. When such a policy is paid to the corporation, the income is not exempt, because the law provides that the exemption shall exist only as to "the proceeds of life insurance policies paid to individual beneficiaries.'' Similarly, life insurance paid to partnerships should be included in the gross income of the partnership. B. Items Considered Gross Income. Salaries, Fees, Wages and Commissions. 42. The first two items accounted for as gross income in the Return are described as (1) ❝Salaries, Wages and Commissions" and (2) “Professional Fees," which includes generally all payments for personal services. Salaries, professional fees, commissions, and other forms of compensation for services are to be considered income when received, regardless of when earned. Suppose a man earning $200 a month is paid on the fifth of every month for his work of the preceding calendar month. He, therefore, receives his pay for December, 1916, on January 5, 1917. That sum is to be included in his tax Return for 1917. But he should not include his salary for December, 1917, which he does not receive until January, 5, 1918. So, also, an agent on commission who receives, in January, 1917, a large amount in settlement of the commissions earned during 1916 must pay tax upon that sum for the year 1917, although his business transacted in the year 1917 may actually be so small that he has not earned any taxable net income on that year's business. The compensation of a trustee or executor should be included in the Return for the year when it was received, even though the services may have been entirely performed in other years. The same rule should be followed in reporting compensation for professional services, but the regulations require that fees charged on the books should be accounted for as income, even though they have not been collected. 43. Profit-sharing or bonus or other special form of compensation is income, if it is in fact a payment for services, but not if it is a gift. It is often difficult to ascertain whether sums paid by an employer in addition to the stated compensation are donations, or gifts, or whether they are rewards for specially productive services, or whether they are merely a part of a salary which is contingent in amount. If the payment is given in return for services, it is income to the employee. If it is a gift, it is not taxable income. If the contract expressly provides for profit sharing, of course, the payment is part of the compensation. The same is true where the payment is a regular practice, so that the special bonus is expected and counted upon by the employees as part of their compensation. Where the payment is made only once, or not as a fixed custom, it may be expressly declared to be a special compensation, in which case it is income to the employee, or it may be expressly given as a benevolent donation, which is not taxable. Circumstances indicate whether it is regarded by employer and employee as gift or compensation. Christmas gifts, even though customarily and regularly made, are not taxable income. 44. Incidental Benefits. Living quarters, board and lodging, rent, or expenses allowed in lieu of salary, must be accounted for as income. Where the compensation for services is paid in part by furnishing a place to live, food, clothes, or any form of valuable goods, the value of such benefits furnished should be estimated in money and included in income. When employees receive incidental benefits from their employment, as for example, free rent, fuel, automobile use, free passes, etc., these constitute taxable income whenever they are in fact part of the employment contract and some face value is attached to them. This does not include special expenses incurred in connection with the business and repaid by the employer. For example, a minister receiving a salary of $1,500 per year is supplied with a furnished parsonage with a rental value of $900 per year. His gross income is $2,400. He is sent by his congregation to attend a convention in a distant city, and receives his railroad fare, hotel bill, and expenses. These latter sums are not income. 45. Insurance agent's commissions from renewal premiums are income when received. A commission deducted from the premium and retained by a life insurance agent for writing a policy on his own life is income accruing to the agent. 46. Pension Fund. Deductions from salaries or wages made by the employer to cover compulsory or voluntary contributions to pensions, sick, or insurance funds should be added to the amounts received in reporting income subject to tax. 47. Gratuities and Tips. Where a tip actually represents compensation for services, it is income of the person receiving it, notwithstanding that the amount is optional to the giver. This includes tips of waiters, bell boys, Pullman porters, and others who are customarily paid for their services in this way. Where tips are not a general practice they are a donation and do not purport to be a compensation. Gratuities not in the form of money, such as cigars, candy or other presents, are not income in any case, as they are not taken as representing money. 48. Fees of clergymen are income. The clergyman who officiates at a wedding or funeral receives only what is offered to him. His fees are none the less income and must be included in the Return. Where a congregation takes up subscriptions to supply its minister with clothes, furniture, or a vacation, it must be determined in the particular case whether it is a donation, which is not income, or whether the compensation is otherwise indefinite in amount and is supplemented by such payments, making them income. Business, Trade, Commerce, Sales. 49. Sale of Property. Profits from sale of property of any kind is income. The property here referred to includes property held as capital, or principal, as well as product or output. Where property is sold which has been held as representing an investment of capital or which has been bought for resale, the entire price is not income, but only the difference between the original cost and the selling price. Such profit is income in the year in which it is realized, notwithstanding that the sale may be made at less than the book value or appraised value at some intermediate time. A man buys a piece of real estate in 1914 and sells it in 1917 at a profit. The profit is income of the year 1917, and will be subject to tax at the 1917 rates, even though it may have actually accrued largely during 1915 and 1916. 50. Realized Profit. A paper profit or merely a bookkeeping gain, not actually realized in money or otherwise "cashed in," is not income. Suppose stocks, selling on the exchange, are bought at 56 and at the end of the year are selling at 96; in business talk, the fortunate purchaser has made a profit of 40 points, but as he has not yet sold the stock this profit may be increased or decreased before it is finally realized, and the result may ultimately be such a decline that the profit is entirely lost. Therefore, until there has actually been a conclusion of the transaction, there has been no realized profit and no income tax is imposed. On the same principle, the Return should not include as gain or profit an increase in the value of real estate, an increase in the book value of assets of a corporation or partnership, an increase in the value of a stock of merchandise, based upon a market value higher than the cost price, or any other book gain which is not actually realized. 51. Profit Accrued Before March 1, 1913. A profit, accrued before March 1, 1913, that is, before income was taxable, is not taxable, even though it was realized after that date. The fair market value as of March 1, 1913, is deducted from the selling price of property purchased before that date to determine the profit. Suppose that, in 1909, suburban real estate was bought for $8,500. During the next two or three years the neighborhood develops very rapidly, so that in 1912 the property is worth $12,500 and similar pieces are sold for that price. In 1917, the land in question is sold for $15,000. There is a profit of $6,500, which is all realized in 1917; but it is expressly provided in the law that in the case of property, real, personal, or mixed, acquired before March 1, 1913, the amount of gain shall be determined upon the basis of the fair market price or value as of March 1, 1913 (the date when the first income tax law went into effect). In the transaction described, therefore, the taxaable profit is only $2,500, which is income for the year 1917. In the same way, if there is a dissolution of a corporation, and the stockholders receive much more in return than they originally invested, their taxable incomes should include only that part of their gain which remains after deducting from the amount received, the fair value of their stock on March 1, 1913. 52. Footnote 1, on page 2 of the Return, states that where there is a profit realized in such a case, a statement should be made showing the selling price, the value as of March 1, 1913, and the way in which such value was determined. 53. In the case of stocks and bonds traded in upon exchange, the prices quoted on the exchange would ordinarily represent the fair market price as of March 1, 1913, although proof of this may be necessary if it is questioned by the Treasury Department. It is not merely an "actual market price" which is to be taken, but the "fair market price or value." Where there is a fluctuation in price during the day, the average for the day should be taken as this most nearly represents the price for the entire day. 54. In the case of real estate, jewelry, merchandise of any kind, stocks not listed on an exchange, or any other property which does not have a public market price, the fair value as of March 1, 1913, may be shown by any relevant evidence. Actual facts always supersede prima facie evidence. 55. Cost of Property. The cost of property, as used to determine profit, will include expense incident to the procurement, holding, and disposition. In buying real estate, it is necessary to pay brokers' commissions, lawyers' fees, stamp taxes, recording fees, etc., which are properly considered part of the cost and should be deducted from the selling price in ascertaining profit. Like expenditures in connection with the sale may also be deducted. The rule is the same where personal property is bought and sold at a profit. Carrying charges, such as storage for |