grain, taxes for unoccupied real estate, interest on stock bought on margin, and insurance, if incident to a buying and selling transaction rather than a general expense, may also be applied against the profit. In the same manner, if the property has been bettered or improved, in order to sell for a higher price, or if a house is repainted, grain is cleaned, animals are fattened, or an automobile is overhauled, the expense of such improvement may be added to the cost and only the profit made after deducting such charges is returned as income. Of course, if the net income is determined by making a deduction of these items when the expenditure is made, they cannot later be considered in making deductions for the purpose of arriving at profit. They cannot be included as a part of the general expense, and also as part of the cost of property.

56. Selling Price. The selling price includes promissory notes, securities or anything accepted as cash. Mortgages and mortgage notes, deferred payments evidenced by notes or otherwise, or any other method of receiving payment of the price for property in installments, must be treated as if the entire price was paid in cash for the purpose of ascertaining profit, and must be included as income. In case any installments should be unpaid or any notes should prove worthless, that amount may be deducted from income in a subsequent year, when such losses occur and are charged off as bad debts. The sale of the property is regarded as a closed transaction and the collection of the notes as a new item. It may happen that the amount of certain notes, included in income in 1915 and taxed 1%, may later be deducted as bad debts in 1917, when a 4% tax is saved, so that there is not the perfect balance which the statement of the practice would indicate.

57. Recently the Treasury Department has held in the case of a real estate subdivider that the profit may be apportioned and that each dollar received under the contract represents in part, return of the cost, and in part, a portion of the profit. For example, if the total cost of each lot was $250, and the selling price was $450, payable in monthly installments of $5 each, the Return may treat 4/9 of each payment as profit, and show a profit during the year of 4/9 of $60, or $26.66, and the same amount in subsequent years until the whole profit of $200 has been accounted for. On the other hand, the first year's profit may be returned as $200, and the actual payments subsequently received will not be scheduled as income.

58. Profits from a Mercantile Business. It may be difficult to determine with technical accuracy how much an individual in a mercantile business has actually received as income from his business during the year. But such technical accuracy is not required by the Treasury De

partment, which recognizes any fair and business-like method of striking a balance. The general rule is as follows: The inventory of goods, taken at the beginning of the year, is added to the purchases, the total representing what has been put into the business; the sales during the year, added to the inventory taken at the end of the year, represents what comes out of the business; the difference between the two is the year's gross income. Running expenses and losses are subsequently shown in the report as deductions from the gross income in determining net income. This is explained more fully later.

59. Thus, we will say John Langer, grocer, has determined his stock in trade as worth $6,000 on January 1, 1917. During that year he has paid $15,000 for goods purchased. This is a total of $21,000. During the year he has sold $20,000 worth of goods and his inventory on January 1, 1918, shows stock on hand worth $7,000. This is a total of $27,000. The difference between $21,000 and $27,000, or $6,000, shows his gross income. On page three of the Return he lists and totals the general deductions which include expenses, losses, etc. These are taken from the $6,000 in determining the net income.

60. As stated, to determine the income of a mercantile or manufacturing business, an inventory is usually necessary. If an inventory is not used, the Return must show that some other practical method was used. A physical inventory will be accepted, where it is accurately kept. The inventory may be taken at cost price, which is customary, or at present market price, or at a book value representing market price of some prior time. It is of importance only that the inventory at the end of the year be of the same nature as that of the beginning of the year so that the income does not reflect as a profit or loss what really is a mere change in market or book value.

61. Profit Where Goods Sold Are Re-taken on Default. Property is often sold on installments, on condition that if the buyer defaults in payments the seller may re-take the goods and may also keep all payments made before that time. In such a case, the seller has the same property that he had before the sale, although it is of less value, and therefore all money received in excess of the amount by which the value has diminished is income. Since the price was treated as, in part, a return of the cost of the property and the profit only was returned as income, it is necessary, when the property is recovered by the seller, to include in the income that year all amounts received which have been in excess of the amount returned as profit and have been treated as a return of cost, to the extent that such amounts exceed the difference between the cost and the value of the property when re-taken.

62. Property Exchanged. Where property is exchanged and there is no cash valuation, the cost of the property originally held must be treated as the cost of the property received in exchange. When there is later a sale for cash, the profit will be the excess over the cost of the original property. Where the exchange is on a cash basis, and the property has a definite cash value, or is valued by the parties for purposes of the exchange, it may be treated as a closed transaction and the profit on the property first held, accounted for as income. The cash valuation is then the cost of the property received.

63. Sale of a Gift. A man inherits real estate in 1914 which is fairly worth $60,000 and is valued at that amount in the accounts of the probate court. In 1917, the property is sold at a clear gain of $10,000 over all expenses. This gain is taxable, as it represents the income from property received as a gift and not a gift itself. The taxable gain is the excess of the selling price over the fair value as of March 1, 1913, or when acquired.

64. Stocks and Securities. Profit from sales of stocks and securities is income. Where stocks or other securities are sold for more than their cost, including the expenses of purchase and sale, the difference is profit and is taxable as income. Regardless of how long the stock has been held, the entire profit is income in the year in which it was received, except to the extent that the profit was earned prior to March 1, 1913.

65. In and Out of the Market. It is difficult to ascertain the amount of profit, not only with reference to the income tax law, but even as a practical matter, in the case of the person who is "in and out" of the stock market on a single stock or on a number of stocks. For example, Walter Hinman buys 500 shares of Airplane preferred at 60 in January, 1,000 in February at 65, sells 750 in March at 70, buys 1,000 more in May at 66, sells again in June 750 at 69, and again in July sells 500 at 71. He still has 500 shares. The Treasury Department requires that wherever possible the shares be identified by certificate number, and the exact profit for the particular certificate accounted for. Frequently, this is not possible; for instance, Hinman may have had a single certificate issued in February for his 1,500 shares, or again in May for his 1,750 shares. We do know that he bought, altogether, 2,500 shares and that he sold 2,000. The rule is that the sales must be charged against the stock first purchased in successive order; that is, the cost of the 2,000 shares sold shall be figured at the cost of the first 2,000 bought. The rule assumes that the first stock purchased is the first stock sold. The 500 shares which he has retained are considered as costing the price last paid, this in our illustration being 66.

66. Profits Upon Different Issues of Stock. Many people who trade in stocks accept their broker's account of their balance without knowing after the lapse of time, just which stock made their profit. This does not give sufficient data to make a complete Return. If there is a profit on some stocks and a loss on several others, and the year is closed with a credit balance and also large holdings, which have been in part purchased with profits made in the market, it is obvious that the cash balance alone does not represent the income. The actual gains must be shown, and the prices actually paid for the stocks held at the end of the year must be known, so that income for the next year may be computed. All the profits made in trading in stock without deduction for losses must appear on the income side of the Return. Suppose Hinman buys 2,000 shares of Metal Boat Company stock at $35 a share and at various times during the year sells as follows: 500 shares at $40, 500 at $33, 500 at $31, and 500 at $36. He has lost money, but on the income side of his Return he must account for the profit made on the two sales without deducting the losses on the other two. In other words, he must account for $3,000 income. We will later discuss the deduction of the loss. As with stock, so in the case of any other property, if there is a sale at a profit, income has actually been received and must be accounted for, even though losses may have been suffered upon other sales. Such losses, if allowable at all, can be deducted only by including them in the General Deductions.

67. Corporation's Treasury Stock. The proceeds from the sale of "Treasury Stock" donated to a corporation should not be listed as income. Value of a gift is not income, and if it is sold for the same value as when received, the proceeds are not income. If, however, the stock is sold for more than the value at which it was received by the corporation, the excess is profit and therefore taxable income. Income, however, is neither increased nor decreased to a corporation by reason of the sale of its own stock upon original issue at a price greater or less than its par value; therefore neither premiums, nor discounts, nor gross proceeds, are considered in determining net income of a corporation from the original issue of its stock.

68. Property Purchased by a Corporation with Its Stock or at a Nominal Valuation. Corporations frequently issue stock in payment for land or other property and the par or face value of the stock may be entirely disproportionate to the value of the property. When such property is later sold, the profit or loss is determined by fixing as nearly as possible the true value of the property when acquired, subject to the approval of the Treasury Department, and deducting this estimated true value from the selling price, or vice versa as the case may be. The value thus fixed

represents also the cost of the stock to the owner, and should be used as the basis for determining profit or loss when the stock is sold.

69. Accounts Receivable. In the ordinary course of business, accounts due for sales on credit, money advanced, deferred payments on contracts, etc., are generally regarded as though they were actually collected for the purpose of making balances and figuring profits. This practice has been adopted by the Treasury Department, and it has required individuals conducting a mercantile business, corporations, and professional partnerships, to include in their gross income their accounts receivable. The same rule would apply with even greater reason to bills receivable, meaning promissory notes, drafts, and other commercial paper, which are usually subject to discount for cash and which are generally considered as a cash asset. Such income may never be received, but the law allows bad debts to be deducted as a loss. However, it may well be that during the year in which debts are charged off, there may be no profit from which they may be deducted as a loss, and the tax paid is forever gone. If a young man, just establishing a grocery business, has at the end of the year outstanding and uncollected accounts for $1,500 which is over and above the expenses of the business he must schedule that sum, although he has not collected one dollar from his business and has been compelled to borrow money to pay his living expenses.

70. Accounts receivable, which have been scheduled as income in the year they accrued, should not be included in the income of a subsequent year when paid. Suppose our young grocery man relinquishes his business on December 31, and takes a salaried position. His salary, we will say, is just $1,000 this year, but during this year he is able to collect $1,000 of his old accounts receivable. He receives in actual cash the total sum of $2,000. Nevertheless, he will not be compelled to pay any tax, because he has already paid upon $1,000 as accounts receivable. Suppose now that he definitely charges off the balance of the old accounts amounting to $500 as bad and uncollectable debts. He will now have no taxable income against which to charge the tax paid on this amount during the preceding year, and it is totally lost. Had his salary been $1,500 he could have charged the tax against the $500 amount on which he would otherwise have had to pay a normal tax of 2%.

71. Farm Products. Receipts for farm products are income. When the product of a farm is sold, the entire receipts from such sale must be accounted for as gross income, although only a small part of such receipts is profit. The expense of producing is included in the deductions from gross income. For example, expense is incurred in planting wheat in the fall of the year and the grain is harvested and sold in the next year. The