such expense in the deductions of that year, and file a claim for refund for any taxes overpaid by reason of failure to deduct such expense or liability in the original return of that year.119

119 Reg. 33 Rev., Art. 128.

CHAPTER 17

INCOME FROM PERSONAL SERVICES

The law expressly provides that the net income of a taxable person shall include gains, profits, and income derived from salaries, wages, or compensation for personal services of whatever kind and in whatever form paid, or from professions or vocations. It is to be noted that salaries, wages, or compensation for personal services are taxable income "in whatever form paid." Where services are paid for in something other than money, the fair market value of the thing taken in payment is income. This is one of the three cases in which the law expressly specifies that the tax shall be based upon payments other than in cash, the others being the provision relating to dividends and the provision relating to exchanges of property. Payment of salaries, wages, etc. in the form of living quarters, board or lodging, is referred to in the preceding chapter.

3

Salaries. Under the 1916 Law it was held that salaries should be reported in the year in which actually received and not necessarily in the year in which earned. Under the present law it seems the salary will be considered as income of the year in which earned if the amount is determined in that year and paid in the following year merely by reason of delay incident to delivery of the cash or check in due course. A salary paid by a corporation which is itself exempt from the income tax is neverthe

1 Revenue Act of 1918, § 213 (a).

2 Reg. 45, Art. 32.

3 Revenue Act of 1918, §§ 213 (a) and 201.

4 Revenue Act of 1918, § 202 (b).

less subject to tax in the hands of the employee. In the case of corporations, so-called "salaries" of stockholders, if unreasonable in amount and if based on the amount of stock held, are considered to be distribution of the net profits of the corporation, not deductible as a business expense of the corporation, and, therefore, not subject to the normal tax in the hands of the recipient."

Bonuses and Profit Sharing. Where employees receive bonuses, or are entitled to a share of the profits of the employer the amount so received should be included as income, provided (a) it is clearly made as compensation for services rendered and (b) it is paid under a contract, express or implied, or a long time practice, (practically an implied contract), regularly employed, which constitutes a condition, if not a contract, under which the employees may reasonably expect additional pay for the greater or better services which they render, or (c) the total amount of salary and bonus is not greater than a reasonable compensation for the services rendered by the employee.7 Such payments are income to the employee if they are of such character that the employer is entitled to deduct the same as an expense of doing business. If the bonus is a mere gift, the employee should not treat the amount as income, since gifts or gratuities are not taxable, and the employer is not entitled to deduct the amount from his income as an expense of doing business. The rules governing the deduction of bonuses and profit sharing payments are more fully treated under the heading of deductions, which should be read in this connection. The rule, to be followed by the employee is that if the employer is entitled to deduct the amount as an expense of doing business, the employee should return the amount as income, and, vice versa, if the employer is not entitled to deduct the amount as expense, the employee should not return the amount as income,

5 T. D. 2135; T. D. 2090.

6 Reg. 45, Art. 106; T. D. 2696. See p. 436.

7 Reg. 45, Art. 107; T. D. 2696. See p. 439.

8 See Chapter 28 on Deduction of Business Expenses.

otherwise the same sum of income would be taxed twice. If so-called bonuses or profit sharing are paid to stockholders of corporations, which are in fact distributions of net profits based on stock holding, they will be considered as dividends and held to be taxable as such.10

Salaries of Partners. As a general rule members of a general partnership are not entitled to salaries, and the Treasury Department will not recognize the payment of salary to a partner unless such salary is provided for in the articles of partnership or by express contract.11 The question is not of very great importance under the income tax law under which partnerships are not taxed as entities. It assumed importance under the 1917 excess profits tax, for which tax partnerships were allowed to deduct amounts representing a reasonable allowance for salaries of part

Voluntary Offerings Received by Clergymen. Although as a general rule gifts and gratuities are not income, yet Easter offerings, and fees received by clergymen for funerals, masses, marriages, baptisms, etc., are considered income, because though in the form of gifts they are in fact payment to the clergymen, evangelists, and religious workers for services rendered.13 Chirstmas gifts to clergymen do not come within this category.14 The rule to be observed is whether or not the money is actually a gift or merely in the form of a gift.

Commissions. Commissions paid or credited or made available to salesmen are income, which should be accounted for in the return of the person receiving the same in the year in which received or the year in which such commis

9 One exception is made to this rule by the Treasury Department. See p. 438.

10 Reg. 45, Art. 106; T. D. 2696.

11 Letter from Treasury Department dated March 19, 1917; I. T. S. 1918, ¶ 664.

12 Reg. 41, Art. 32.

13 Reg. 45, Art. 32. 14 T. D. 2090.

sions were credited or made available to the recipient salesmen so as to be constructively received.15

Compensation for Services Extending Over a Year. Where no determination of compensation is had until the completion of the services, the amount received is ordinarily income for the calendar year of its determination or receipt.1 16 It was held under the 1916 Law that if no determination has been made of the amount due the trustee of an estate, as compensation for his services over a period of years, until the trust was terminated, the amount allowed him should be returned in full as income for that year, and it should not be pro-rated over the length of time the services were rendered.17

Compensation to Federal Government Officers and Employees. Compensation received as such by officers and employees whether elected or appointed of the United States, or of Alaska, Hawaii or any political subdivision thereof, or the District of Columbia is subject to tax whether paid in cash or in other forms.18 The entire sum received, however, is not necessarily taxable as will be indicated in the following paragraphs.19

LIVING QUARTERS. Commutation of quarters and the money equivalent to quarters furnished in kind should be returned as income. When quarters are furnished in kind of a less number of rooms than the number allowed by law, the money equivalent only of the number of rooms actually assigned should be returned as income. When quarters are furnished of a greater number of rooms than the number allowed by law, it is to be assumed that the excess number is assigned for the convenience of the Gov

15 Reg. 45, Art. 32; T. D. 2090; Letter from Treasury Department, dated April 30, 1918; I. T. S. 1918, ¶ 3342.

16 Reg. 45, Art. 32. This point is more fully discussed in Chapter 16 on Income-In General.

17 T. D. 2135.

18 Revenue Act of 1918, § 213 (a).

19 T. D. 2079.