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CHAPTER 20

INCOME FROM SALES DR DEALINGS IN PROPERTY

The law expressly provides that gains, profits and income derived from sales or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property, shall be taxable. It has been argued that gains resulting from an increase in capital should not be taxed, in cases where an owner was not engaged in the business of dealing in such property, but the language of the statute is broad enough to indicate that Congress intended the tax to apply to all transactions whether or not the taxpayer is a dealer.2 A leading case 3 construing the income tax act of 1864 held that the gain to an individual resulting from the sale of property, purchased by him several years before, was not taxable, on the theory that the increased value of the property could not be said to be gain in any particular year of the time during which it was held. It has been argued that the rule laid down in this case should be applied to the present law, but the language of the statute under which the case was decided differs considerably from the language of the 1909, 1913, 1916 and 1918 Laws and it is not certain whether such a rule would be applied to the construction of the present statute. The intent of the 1913 and 1916 Laws and the Revenue Act of 1918 seems clearly to be that gains from sales or dealings in property, regardless of whether the property is sold in the course of a business or trade or otherwise, shall be taxed. It has been held by the Treasury Department that gains and profits resulting from a sale of property are subject to tax. The gain, profit or income is the amount by which the selling price exceeds the cost. Book values are ignored where they do not represent the actual cost of the properties. The entire profit is taxable unless the property was acquired prior to the incidence of the tax. 8

1 Revenue Act of 1918, $ 213 (a).

2 In Doyle v. Mitchell Brothers, 247 U. S. 179, decided under the 1909 Law, the Court said: “Selling for profit is too familiar a business transaction to permit us to suppose that it was intended to be omitted from consideration in an act for taxing the doing of business in corporate form upon the basis of the income received 'from all sources. Although the plaintiff in this case was not a real estate trading corporation the court proceeded on the assumption that certain of the proceeds of a conversion of stumpage lands should be treated as income, the difficult question at issue being to differentiate between the capital and income of such proceeds. In Hays v. Gauley Mountain Coal Co., 247 U. S. 189, although the plaintiff was not engaged in the business of trading in stocks and did not have such business among its corporate powers, the court held that so much of the profits from a sale of certain stock as might be deemed to have accrued subsequent to December 31, 1908, must be treated as gross income. See also U. 8. v. Cleveland &c. Ry. Co., 247 U. S. 195. These cases, however, construed the 1909 Law, which was not an income tax law, but a law imposing an excise tax. 3 Gray v. Darlington, 15 Wall. 63.

Cost of Property. The cost of property is the actual price paid for it at the time of purchase, together with the expense of procuring it and the expense of selling it. Interest should not be added to the purchase price in order to ascertain cost. If improvements or betterments have been made the cost of such improvements or betterments may also be added to the cost of the property.10 It is also permissible to add to the initial cost of the property carrying charges provided they are such as have been capitalized and not deducted from net income in any annual return of the owner subsequent to the income tax.11 Such cost must be reduced by the amount of any depreciation deducted from net income since February 28, 1913.

4 It is stated by Mr. Justice McKenna in Lynch v. Turrish, 247 U. S. 221, that the case of Gray v. Darlington decided that such an advance in value is not income at all, but merely increase of capital and not subject to tax as income.

5 Revenue Act of 1918, $ 213 (a). 6 T. D. 2090, T. D. 2137.

7 See Doyle v. Mitchell Brothers, 247 U. S. 179; U. S. v. Guggenheim Exploration Co., 238 Fed. 231; Forty-Fort Coal Co. v. Kirkendall, 233 Fed. 704, upon the question of the weight to be attached to book entries.

8 T. D. 2090; Letter from Treasury Department dated August 14, 1914; I. T. S. 1918, 1 395.

9 Hays v. Gauley Mountain Coal Co., 247 U. S. 189.

PROFIT NOT BASED ON BOOK VALUES. The values at which property is carried on the books of the owner is not conclusive evidence of its actual value. Where the Government attempts to impose a tax upon the difference between the book value and selling price, the taxpayer may show by other evidence the actual cost thereof or the actual value at the incidence of the tax.12

SHARES OF SAME STOCK Bought at DIFFERENT PRICES. When various parcels of stock of the same issue are bought and sold on different dates and at different prices, the shares sold should be identified, if possible, by the numbers of the certificates covering them, and the cost of the identical shares should be deducted in order to determine the profit. Where it is impossible to identify the shares in this manner, the shares should be considered to be sold in the order in which they were purchased, that is, the cost of the first shares purchased should be deducted from the selling price of the first shares sold.13

PROPERTY ACQUIRED BY A CORPORATION FOR STOCK. In cases where property was taken over by a corporation in exchange for its capital stock, at a par value greatly in excess of the true value of the property, and such property is later sold, it has been held by the Treasury Department that it will be necessary to ascertain as nearly as possible the true value of the property at the time it was taken over, and any excess over this ascertained value is income. Similarly, it has been ruled that where corporations have acquired for a mere nominal sum, property which at the time of its acquirement had a value greatly in excess of such sum, a careful estimate of the value of the property at the time it was acquired may be fixed and set up as the value representing the cost of the property, and any excess over such fixed value, at which such property may thereafter be disposed of, will be treated as income. The value of property so fixed is subject to the approval of the Internal Revenue Bureau.14 The Revenue Act of 1918 provides that when property is exchanged for other property, the property received in exchange shall for the purpose of determining gain or loss be treated as the equivalent of cash to the amount of its fair market value, if any,16 and it seems the “cost” in a subsequent sale by a corporation of property acquired in exchange for its stock would be the equivalent of the "fair market value' of the stock issued therefor.

10 T. D. 2090. 11 T. D. 2137.

12 Doyle v. Mitchell Brothers, 247 U. S. 179; U. 8. v. Guggenheim Exploration Co., 238 Fed. 231; Forty-Fort Coal Co. v. Kirkendall, 233 Fed. 704.

13 Letter from Treasury Department dated February 26, 1916; I. T. S. 1918, 11 413 and 1343; Reg. 45, Art. 36.

PROPERTY LEFT BY A DECEDENT. When an individual dies after March 1, 1913, leaving property, all gains or losses on subsequent sales should be computed on the basis of the appraised value of the property at the date of death of the former owner. Neither the executors nor anyone acquiring the property of the decedent is required to make a return of the book gains or losses up to the date of death. If the executors should sell the property the difference between the appraised value at the date of death and the selling price constitutes the taxable profit. If the property is transferred to a beneficiary of the estate no income accrues to the beneficiary as a result thereof, since the value of property acquired by gift, bequest, devise or

14 T. D. 2161. These rulings were made under the 1913 Law, February 19, 1915, and have not been repeated in later compilations. 15 Revenue Act of 1918, § 202 (b). See Page 302.

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descent is exempt from tax.16 Any income which the beneficiary thereafter derives from such property is taxable and, if such property is sold, the difference between the appraised value of the property at the date of decedent's death and the selling price constitutes the taxable profit.17 In cases where an individual died prior to March 1, 1913, the value on March 1, 1913, of any property left by the decedent is the amount to be used as a basis for computing the taxable profit in any subsequent sale by the executors or the beneficiaries.

Property Acquired Before March 1, 1913. The Revenue Act of 1918 provides that for the purpose of ascertaining the gain derived or loss sustained from the sale or other disposition of property, real, personal, or mixed, acquired before March 1, 1913, the fair market price or value of such property as of March 1, 1913, shall be the basis for determining the amount of such gain derived or loss sustained.18 This provision applies in all cases of individuals and corporations. In all such cases the original cost of the property is disregarded and the value as of March 1, 1913, is taken, whether or not such value is more or less than the original cost. Under the 1909 and 1913 Laws it was the practice of the Department to require the taxable profit to be determined by first ascertaining the difference between the cost and the selling price and then pro-rating the result according to the number of months the property was held before and after the incidence of the tax, but this rule has no application under the present laws, except as a last resort when the value as of March 1, 1913, cannot be found by other means.19

16 Revenue Act of 1918, $ 213 (b) 3.

17 Reg. 33 Rev., Art. 4. Telegram from Treasury Department dated February 3, 1917.

18 Revenue Act of 1918, $ 202 (a) 1. This provision first appeared in the 1916 Law, no reference being made in the 1909 Law or the 1913 Law as to assets acquired prior to the incidence of the tax.

19 In Doyle v. Mitchell, 247 U. S. 179, no question was raised as to whether, in apportioning the profits derived from a distribution of capital assets acquired before and converted after the incidence of

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