MARKET VALUE OF SECURITIES ON MARCH 1, 1913. Where stock, acquired prior to March 1, 1913, is sold, and such stock was traded in on an exchange, the fair market price or value as of March 1 is held to be the average price for the day in cases where there is a variation between the opening and closing price.20

SPECIAL RULE IN CASE OF BOOK VALUES REPORTED UNDER 1909 LAW. Under the provisions of the 1909 Law the Treasury Department permitted income to be computed on the basis of changes in book values. Hence, where a corporation for the years 1909 to 1912 inclusive, made its returns strictly in accord with the regulations then in force, the increase of book values of property being returned as income and corresponding decreases being deducted, as the regulations then required and permitted, the profit on such property could be computed under the 1913 Law by deducting the amount of the last adjusted value subsequent to January 1, 1909, without pro-rating as required in other cases.21 This ruling has no application under either the 1916 Law, or the Revenue Act of 1918, which expressly requires, in all cases, that the gain be based on the value as of March 1, 1913, regardless of any book values prior thereto.

Selling Price. The selling price is the amount received

the tax, the division should be pro rata according to the time elapsed, or should be based upon an inventory taken as of the day before the incidence of the tax. The latter method was adopted and the government made no contention as to the accuracy of the result thereby reached. In Hays v. Gauley Mountain Coal Co. 247 U. S. 189, the court referred to the method employed as a matter of detail, to be settled according to the best evidence obtainable and in accordance with valid departmental regulations, and in the case at bar, involving a sale of securities, there being no evidence of inventory value, a prorating method was adopted. In U. S. v. Cleveland etc. Railway Co., 247 U. S. 195, the market value of stock on the last day before the incidence of the tax was taken as a measure of capital assets. (See T. D. 2740.)

20 Letter from Treasury Department dated November 21, 1916; I. T. S. 1918, ¶¶ 410 and 1329.

21 T. D. 2130,

for the property. It may be held to be taxable whether received in cash or in the equivalent of cash.22

Sale of Patents and Copyrights. A taxpayer disposing of patents or copyrights by sale should determine the profit or loss arising therefrom by computing the difference between the selling price and the value as of March 1, 1913, if acquired prior to that date, or between the selling price and the cost, if acquired subsequently to that date. The profit or loss thus ascertained should be increased or decreased, as the case may be, by the amounts deducted on account of depreciation of such patents or copyrights since February 28, 1913, or since the date of purchase if acquired subsequently to that date.23

Sale of Good Will and Trademarks. Any profit or loss resulting from an investment in good will can be taken only when the business, or a part of it, to which the good will attaches is sold, in which case the profit or loss will be determined upon the basis of the cost of the assets, including good will, or their fair market value as of March 1, 1913, if acquired prior thereto. If nothing was paid for good will acquired after February 28, 1913, no deductible loss is possible, although, on the other hand, upon the sale of the business there may be a profit. It is immaterial that good will may never have been carried on the books as an asset, but the burden of proof is on the taxpayer to establish the cost or fair market value on March 1, 1913, of the good will sold.24

Sale of Personal Property on the Installment Plan. Dealers in personal property ordinarily sell either for cash, or on the personal credit of the buyer, or on the installment plan. Occasionally a fourth type of sale is met with, in which the buyer makes an initial payment of such a substantial nature (for example, a payment of more than 25 per cent) that the sale, though involving deferred

22 For a discussion of income in the equivalent of cash see chapter 16 on Income-In General.

23 Reg. 45, Art. 37. 24 Reg. 45, Art. 38.

payments, is not one on the installment plan. In sales on personal credit, and in the substantial payment type just mentioned, obligations of purchasers are to be regarded as the equivalent of cash, but a different rule applies to sales on the installment plan. Dealers in personal property who sell on the installment plan usually adopt one of four ways of protecting themselves in case of default: (a) through an agreement that title is to remain in the seller until the buyer has completely performed his part of the transaction; (b) by a form of contract in which title is conveyed to the purchaser immediately, but subject to a lien for the unpaid portion of the purchase price; (c) by a present transfer of title to the purchaser, who at the same time executes a reconveyance in the form of a chattel mortgage to the seller; or (d) by conveyance to a trustee pending performance of the contract and subject to its provisions. The general purpose and effect being the same in all of these plans, it is desirable that a uniformly applicable rule be established. The rule prescribed is that in the sale or contract for sale of personal property on the installment plan, whether or not title remains in the vendor until the property is fully paid for, the income to be returned by the vendor will be that proportion of each installment payment which the gross profit to be realized when the property is paid for bears to the gross contract price. If, for any reason, the vendee defaults in his installment payments and the vendor repossesses the property, the entire amount received on installment payments, less the profit already returned, will be income of the vendor for the year in which the property was repossessed. If the vendor chooses as a matter of consistent practice to treat the obligations of purchasers as the equivalent of cash, such a course is permissible.25

Sale of Real Estate in Lots. Where a tract of land is purchased with a view to dividing it into lots or parcels. of ground to be sold as such, the entire value as of March

25 Reg. 45, Art. 39.

1, 1913, or cost, if acquired subsequently to that date, shall be equitably apportioned to the several lots or parcels and made a matter of record in the books of the taxpayer, to the end that any gain derived from the sale of any such lots or parcels may be returned as income for the year in which the sale was made. This rule contemplates that there will be a measure of gain or loss in every lot or parcel sold, and does not contemplate that the capital invested in the entire tract shall be extinguished before any taxable income shall be returned. The sale of each lot or parcel will be treated as a separate transaction and the gain or loss will be accounted for accordingly.26

Sale of Real Estate Involving Deferred Payments. Deferred payment sales of real estate ordinarily fall into two classes when considered with respect to the terms of sale, as follows:

(1) Installment transactions, in which the initial payment is relatively small (generally less than one-fourth of the purchase price) and the deferred payments usually numerous and of small amount. They include (a) sales where there is immediate transfer of title when a small initial payment is made, the seller being protected by a mortgage or other lien as to deferred payments, and (b) agreements of purchase and sale which contemplate that a conveyance is not to be made at the outset, but only after all or a substantial portion of the agreed installments have been paid.

(2) Deferred payment sales not on the installment plan, in which there is a substantial initial payment (ordinarily not less than one-fourth of the purchase price), deferred payments being secured by a mortgage or other lien. Such sales are distinguished from sales on the installment plan by the substantial character of the initial payment and also usually by a relatively small number of deferred pay

ments.

26 Reg. 45, Art. 40.

In determining how these classes shall be treated in levying the income tax, the question in each case is whether the income to be reported for taxation shall be based only on amounts actually received in a taxing year, or on the entire consideration made up in part of agreements to pay in the future.27

INSTALLMENT TRANSACTIONS IN REAL ESTATE. In the two kinds of transactions included in class (1) in the foregoing article, installment obligations assumed by the buyer are not ordinarily to be regarded as the equivalent of cash, and the vendor may report as his income from such transactions in any year that proportion of each payment actually received in that year which the gross profit to be realized when the property is paid for bears to the gross contract price. If the return is made on this basis and the vendor repossesses the property after default by the buyer, retaining the previous payments, the entire amount of such payments, less the profit previously returned, will be income to the vendor, and will be so returned for the year in which the property was repossessed. If the taxpayer chooses, as a matter of settled practice consistently followed, to treat the obligations of the purchaser as equivalent to cash and to report the profit derived from the entire consideration, cash and deferred payments, as income for the year when the sale is made, this is permissible. If so treated the rule prescribed in the following paragraph will apply.2

28

DEFERRED PAYMENT SALES OF REAL ESTATE NOT ON THE INSTALLMENT PLAN. In class (2) in the next to the last paragraph above the obligations assumed by the buyer are much better secured because of the margin afforded by the substantial first payment, and experience shows that the greater number of such sales are eventually carried out according to their terms. These obligations for deferred payments are therefore to be regarded as equiva

27 Reg. 45, Art. 41. 28 Reg. 45, Art. 42.