sale price is included in the gross income of the second year, while the expense is covered by the deductions of the first year. The second year's gross income will be reduced by deducting the expense of planting for the crop of the year following.

72. An exception is made where a person conducts a farm for pleasure and not as his business. In that event, gross income should include not the entire receipts, but only the excess of receipts over expenses, since the expenses can not be deducted on the Return, not having been incurred in the business of the taxpayer.

Rents.

73. Rents are scheduled as income when received. A landlord may collect rent for November and December in January of the next year. Such rent need not be accounted for in the year when it was due, but only when it was received. Rent received in crop shares shall be returned as of the year in which the crop shares are reduced to money, or money equivalent.

74. Any consideration received in lieu of money as rent is income. Board and lodging, or other consideration taken instead of money rent, must be accounted for at its money value. Buildings erected, or improvements made by a tenant as part of the rent must be accounted as profit at the end of the lease. The value of the buildings erected in this manner is the cost, less a reasonable allowance for physical depreciation. Taxes paid by a tenant for a landlord are considered as additional payment for rent and, accordingly, are taxable income of the landlord, who also has the benefit of the deduction for the tax paid.

75. Home Property. The value of the use of property is not income. Where property is used while it is held, as where a house is occupied by the owner and then sold at a profit, the latter only is considered profit. Of course, expenses which are incident to the use could not be included in the cost as "carrying charges,'' as they are really the cost of the use.

Interest.

76. Accrued and Realized Interest. Interest is returnable when received, no matter when accrued. John Simpson loans $1,000 to his brother for five years, receiving`no interest until the loan matures in 1917, at which time the principal and five years interest is received. In the same year Simpson cuts the interest coupons from corporate bonds for the years 1911, 1912, 1913, 1914, 1915, 1916, which he had neglected to collect when

due. The money to pay such coupons was deposited with the trustee at the maturity of the coupons by the debtor corporation. Should the entire interest, both in the case of the note and the bonds, be accounted for as income of 1917, or should any part be excluded?

77. The present law taxes all income "received" in the preceding year, and would therefore seem to cover the entire interest, no matter when due or accrued. However, as a practical matter, the money deposited with the trustee to meet the interest coupons was received by the holder just as if it had been deposited in his own bank account, and it was none the less received by him, although he did not draw it out until later. On this basis, such interest accrued and deposited prior to March 1, 1913, should not be included in taxable income. As to the balance, it is clearly taxable, but the same rule should be applied; it should be returned as received in the year the coupons matured and the tax should be paid at the rate then in effect. The interest upon the notes, or other interest not actually held to the credit of the owner, constitutes income of the year when received. Interest on bank deposits, on open account or on certificates of deposit, whether paid, or accrued and unpaid, must be included in the annual Return for the year in which accrued by the person entitled to receive such interest.

78. Accrued Interest on Bonds at Time of Sale. When a bond is sold between interest dates, the seller and the purchaser apportion the interest becoming payable, and. the amount earned up to the date of the sale is paid by the buyer of the bond to the seller. If interest is payable every six months, January 1 and July 1, and the bond is sold on April 1, the buyer will pay the seller one half of the interest, and that amount should be included in the seller's Return as interest received and not as part of the profit on the bonds. The buyer should not include the amount so paid in his computation of the cost of the bond, but when he receives the interest payment in July, the entire amount is not income to him, but only that part in excess of what he has paid to the seller, and he will therefore include in his Return only one half of the interest received by him.

79. Interest from Bonds of Exempt Corporations. The fact that certain classes of corporations are exempt from tax upon their incomes does not affect the income received by taxable persons from such corporations, as interest upon their bonds, and this interest should be included in income. For example, a mutual benefit cemetery company is not subject to income tax. Suppose, however, to enlarge its operations, it issues interest bearing bonds and sells these to individuals. The owners of the bonds must include the interest received in their taxable income.

80. Interest from Bonds Containing a "Tax Free Covenant.' Corporation bonds commonly provide that the interest will be paid "free of all taxes" which the debtor is required to pay upon, or withhold, from such interest. In any case where a provision of that kind covers the federal Income Tax, the debtor corporation, or the "source" of the income, is required to pay a 2% normal tax upon the amount of the interest on behalf of the owner of the bonds. This is later discussed more at length from the standpoint of the debtor or source. The owner of the bonds receiving such interest, upon which a 2% normal tax has already been paid, indicates that fact in his Return and receives credit for the amount so paid. Where such bonds are owned by a corporation, the debtor is not required to pay any tax and the corporation receiving the interest pays the tax in the usual manner, with no credit or deduction.

81. Incomes of Life Insurance and Mutual Insurance Companies. The income of an insurance company would normally include all amounts received during the year as premiums, as well as income from all other sources. The law specifically provides, however, that where the premiums are in part returned to the policy holder, as in the case of the so-called dividends on life insurance policies, the amounts so returned shall not be included in gross income. In the case of mutual insurance companies, where the premium is in the nature of a mere deposit to cover losses, such premium may be entirely omitted from the Return, except as to such part as is retained for purposes other than the payment of losses and expenses.

82. Income Received from Fiduciaries. A separate entry is to be made on the beneficiary's Return of all income received by him from persons acting in a fiduciary capacity. Corporation dividends received from a fiduciary must be separately entered, since there is no normal tax upon dividends received from domestic corporations. Otherwise, all income received from a fiduciary is subject to the normal and the additional tax.

83. Payment of legacies received from a fiduciary is not income, as it is considered a gift, but the payment of interest upon deferred legacies, and rents and profits from the estate, constitute taxable income, if the tax thereon has not already been paid by the estate as an entity.

84. For the purpose of Return by the fiduciary, income received on behalf of know. beneficiaries, whose interest is actually ascertained, is regarded as the income of the beneficiary, even though not distributed. It is not, however, to be included in the individual Return of the benefi

ciary until actually received by him. For example, if the income of a trust estate is held by the trustee over one or more years, and is then paid to the beneficiary, the beneficiary's individual Return should show the amount received as included in the income for the year when it was actually paid over, notwithstanding that, where the interest of the beneficiary in amounts so retained is definitely ascertained, the trustee is required to make his Return on the basis that the income of the beneficiary includes amounts received by the trustee but not distributed during the year.

Partnership Gains.

85. Partnership gains and profits are income when earned, whether distributed or not. As the partnership is not a separate person, the income which it receives is really the income of its members. The individuals only are taxed. A partnership is not like a corporation, which has an independent existence and owns property independently of its stockholders. A corporation must declare a dividend and distribute its earnings before they belong to the stockholders, but the earnings of a partnership belong to the members immediately and a distribution is merely a matter of accounting. The income of a partnership must be ascertained at the close of a calendar year, or a fiscal year established in the manner prescribed for corporations, and each member must account in his Return for his share, even though he does not actually draw out the money. If the fiscal year is used, a second closing at the end of the calendar year for the purpose of the individual Return is not necessary. When the fiscal year covers calendar years in which different rates of tax applied, the income is to be divided and each part is taxed at the rate applicable, as with corporation income in a similar case. When the money is actually drawn out, after having once been returned as income, it should not then be again included in the Return, as that would tax the same income twice. 86. The gross income of the partnership need not be accounted for by the members, but only the net income, which represents what has actually been accumulated during the year and is available to the members as their gain. However, the distributive interests of the partners in the firm's net income, as determined by the rules herein discussed, should be reported in their Returns, and not their distributive interests in so much of the net income as represents merely actual cash receipts, or includes profits not realized, or is based upon the deduction of items which in ordinary bookkeeping would be charged as expense, but which the Income Tax law does not recognize as allowable deductions.

87. The law requires a Return to be made by a partnership, whenever

requested by the Commissioner of Internal Revenue or a district collector, to show the gross income of the partnership, the deductions made and credits allowed, the net income and the net profits, and the names and addresses and the respective interests of the persons entitled to share in the net profits. This is merely for the purpose of checking up on the Returns of the members, to see that they have included the proper amount and that the net profit has been ascertained in accordance with the law, as the partnership itself is not taxable.

88. A limited partnership, or a partnership in corporate form, is treated as a corporation and must make a Return and pay an income tax. The profits received by the members of such a partnership are treated like dividends and are not subject to the normal tax.

89. The income from partnership gains should not include interest on municipal and government bonds. It is impossible to say just which specific income has been used to pay the expenses of the partnership, but when the net income of the firm has been determined, the total amount received by the firm as exempt income from government securities should be deducted and the balance treated as taxable income of the members. 90. The income from partnership gains should not include dividends received by the partnership upon the stock of domestic corporations, but these dividends should be separately divided and separately shown in the Returns of the individual members. This is done because these dividends are not subject to the normal tax, but only to the additional tax. This method should be followed, although the stock in question is deposited as collateral for a loan and the partnership is paying on the loan and deducting, as an expense, interest which is equal in amount to the dividends received from the stock.

Royalties from Mines and Patents.

91. In a single item of the Return is included income consisting of royalties from mines and oil wells, or from patents, franchises, and other legalized privileges. Mines and mining rights are frequently leased for a payment based upon the number of tons mined, or similarly measured by the output, and this is called a royalty. That part of the receipts is income which represents the excess over the return of the actual capital. A proper calculation must be made to determine how much of the royalties received is capital and how much is income. These deductions from income are considered more fully under "Deductions for Depletion." The royalties received by a patentee are income, as are also the sums received for the sale of license rights. The income above cost is taxable.