cordance with the showing made by their books and inventories.3

Inventories. If the inventory method is adopted, the farmer should, in order to ascertain gross income, add to the amount received from sales made during the year, the inventory of the live stock and products on hand at the close of the year and from this sum deduct the amount expended in purchasing live stock and products plus the inventory of the live stock and products at the beginning of the year. The inventory at the begnining of the year must be the same figure as at the close of the next preceding year and (a) it must include the cost of live stock or products purchased for resale, (b) it may include live stock and products produced on the farm and still on hand. Where gross income is ascertained by inventory, no deduction can be made for live stock or products lost during the year, whether purchased for resale or produced on the farm, as such losses will be reflected in the inventory by reducing the amount of live stock or products on hand at the close of the year. Live stock purchased for draft, breeding, or dairy purposes, or for any purpose other than resale, may be included in the inventory for each year at a figure which will reflect the reduction in value estimated to have occurred during the year through increase of age or other causes. Such reduction in value should be based on the cost and estimated life of the live stock. In the case of loss of such live stock no deduction can be made, as the loss will be reflected in the inventory at the close of the year. When the inventory method is used, the cost price of the article sold must not be taken as an additional deduction, as it is reflected in the inventory.

3 Reg. 45, Art. 35; T. D. 2665. See Chapter 16 on Income-In General for the rules in regard to inventories generally.

4 Reg. 45, Art. 35; T. D. 2665. This Treasury decision uses the expression "stock purchased for draft, breeding or dairy purposes or for any purpose other than resale" for the first time. The intention is apparently to extend the expression "stock used for breeding purposes" used in former rulings to all stock not purchased for resale.

Accounting on an Accrual Basis. Farmers keeping books are required to report their income on the cash or accrual basis, according to the method of accounting employed by them in keeping their books. This subject is discussed elsewhere in this book.

Farmers Not Keeping Books and Not Taking Inventories. All farmers not keeping books and taking inventories must report on the basis of actual receipts and disbursements, in order that their returns may be susceptible of audit for the purpose of verification."

Income. The income of a farmer may be in cash or in kind; that is, like that of any other individual or corporation subject to tax, it may consists of money or of a money equivalent. In general, the income of a farmer may be said to be determined according to the same principles which determine the income of other taxable individuals or corporations, but certain special rules are set forth in the following paragraphs.

VALUE OF PRODUCTS CONSUMED BY FARMER. A farmer is not required to report as income the value of farm products consumed by himself and family.

INCOME FROM RENTS RECEIVED IN KIND. Rents received in crop shares are to be reported as income in the year in which the crop shares are sold or otherwise reduced to money or a money equivalent.9

INCOME FROM SALE OF ANNUAL PRODUCE. All gains, profits and income derived from the sale of annual produce, whether produced on the farm or purchased and

5 Revenue Act of 1918, § 212; T. D. 2665; T. D. 2433.

6 See Chapter 16.

7 T. D. 2665. See Chapter 16 on Income-In General for a general discussion of this subject.

8 Under this rule a farmer may use 100 bushels of potatoes for himself and family without being subject to tax, but if he should sell the potatoes, and use the proceeds in buying other potatoes for his family, he would be taxable. This rule seems incongruous, but may be the only practicable one in the circumstances.

9 Reg. 45, Art. 35; Reg. 33 Rev., Art. 4.

resold by the farmer, must be reported as income for the year in which the product is actually marketed and sold unless the inventory method is used. Where a farmer exchanges farm produce for merchandise, groceries, or mill products, the market value of the article or property received should be reported as income.10

INCOME FROM SALE OF LIVE STOCK. For the purpose of this discussion live stock may be divided into three classes : (1) live stock raised on the farm, (2) live stock purchased by the farmer for the purpose of resale at a later time, and (3) live stock raised or purchased for draft, breeding or dairy purposes, or any purpose other than resale. Where a farmer keeps books and carries the value of his live stock in annual inventories, the total amount received on the sale of any such stock should be entered on his books as gross receipts, and the income therefrom will be reflected through the inventories.11 Where the farmer does not keep books and take inventories, the profit or income from the sale of live stock is, generally speaking, the difference between the cost thereof and the amount received on the sale.12 This general rule is, however, subject to several qualifications or exceptions, as follows:

(a) When the live stock was owned on March 1, 1913. If the live stock was owned by the farmer on March 1, 1913, whether raised on the farm or purchased, the fair market price or value on that date is to be deducted from the selling price; and the cost, if any, is disregarded.13

(b) When the live stock was raised on the farm. If

10 Reg. 45, Art. 35; T. D. 2665. The rulings do not cover cases where farm products are exchanged or bartered for other articles or property having no definitely ascertainable market value, as, for instance, the exchange of one horse for another; and it would seem no taxable income accrues to either party in such transaction. See Chapter 16 on Income-In General.

11 T. D. 2665. The rulings permit, but do not require the value of live stock raised on the farm to be carried in inventory.

12 Of course, if the selling price is less than the cost the result will be a loss.

13 See Chapter 20.

the live stock was raised on the farm, the farmer has no purchase price to deduct and the entire selling price is income, unless the live stock was owned on March 1, 1913, in which case the rule stated in the preceding paragraph will apply. The cost of raising such stock is not deducted from the selling price, since such cost is an annual expense, which should be deducted from year to year, as incurred.

(c) When the live stock has been purchased. When the live stock has been purchased, the purchase price thereof should be deducted from the selling price, unless the stock was acquired before March 1, 1913, in which case the rule stated in paragraph above will apply. The expense of care, feeding and marketing such stock is not deducted from the selling price, but is treated as an item of annual expense.14 A special rule may apply in the cases referred to in this paragraph. Under a former regulation of the Treasury Department 15 a farmer was permitted to charge to expense the cost of live stock purchased for resale. Where the cost of live stock was charged to expense and claimed as a deduction under that regulation in any past year, the entire proceeds from the sale of the same must now be considered as income for the reason that the farmer is not again entitled to the benefit of the deduction which he has already received.16

(d) Live stock used for draft, breeding or dairy purposes. Where live stock has been purchased or raised for draft, breeding or dairy purposes, and is sold, the income is ascertained in the manner indicated in the preceding paragraph, unless the farmer has claimed a deduction for depreciation on such stock in any year.17 In such cases the aggregate amount allowed for depreciation in preceding

14 T. D. 2665.

15 T. D. 2153, dated February 12, 1915.

16 T. D. 2665. In such cases, however, it seems the return for the year in which the stock was purchased might be amended to conform to present rulings and the return for the year in which the stock was sold prepared accordingly.

17 See Page 348 for rules regarding Depreciation.

years must be added to the selling price in order to ascertain the taxable profit.18 Thus, if a horse was purchased for $500 and $35 has been claimed for depreciation in each of three years, where the horse is sold for $550, the taxable profit would be ascertained by adding the depreciation for three years, amounting to $105, to the selling price, making a total of $655, and subtracting from such total the purchase price, of $500, leaving a taxable profit of $155.

In

INCOME FROM SALE OF OTHER FARM PROPERTY. come from the sale of other farm property should be reported in accordance with the general rules set forth in another chapter.19

INCOME FROM OTHER SOURCES. If the cost of produce, live stock or other property which has been lost or destroyed is deducted as a loss and subsequently the farmer is reimbursed in whole or in part by the state or federal authorities (e. g. where the stock has been killed to avoid the spreading of disease) or by insurance or indemnity, the amount so received as reimbursement is income.20 This contemplates a case where the loss may have been deducted in one year and the reimbursement is received in another year. It is allowable, however, and advisable that no loss be claimed in such cases until the reimbursement has been received, as until that time the net loss is not ascertainable. When the reimbursement is received, it should then be treated the same as though it represented the selling price and the gain or loss determined according to the rules set forth in the preceding paragraphs relative to sales. If a farmer works out his road or other taxes and claims such taxes as a deduction he must also include the same amount as income, as by the work he earns sufficient to pay the taxes. If he does not claim deduction for such taxes he need not include a corresponding amount as income. Of course, any income received by the farmer from

18 See Page 351.

19 See Chapter 20.

20 Reg. 33 Rev., Arts. 4 and 123.