culture, or horticulture, in the sale of real estate, timber, etc., for profit, it will be held that such club is not organized and operated exclusively for pleasure, recreation, or social purposes. It thus becomes a business or commercial enterprise, and any profit realized from such activities is subject to the tax imposed by this title, and the club so operated must make returns of annual net income. (Reg. 33 Rev., Art. 72.) [Page 201.] Cooperative Dairies. Cooperative dairy companies or associations not having capital stock and engaged in collecting milk and disposing of the same or the products thereof, and distributing the proceeds of the business, less necessary operating expenses, among their patrons, upon the basis of the quantity of butter fat in the milk furnished by such patrons, are held to be exempt from the tax imposed by this title. (Reg. 30 Rev., Art. 76.) [Page 202.] Associations for Marketing Produce. Cooperative associations, in order to come within the exemption provided in paragraph "eleventh" must establish to the satisfaction of the collector or Commissioner of Internal Revenue the fact that, for their own account, they have no net income, their business being to market the products of their members, and that the entire proceeds of such marketing, less necessary selling expenses, are turned back or paid to the members on the basis of the quantity of produce furnished by themquality and grade being considered-as the purchase price of such produce. If in the course of their business such associations purchase for cash at a stipulated price articles or produce with a view to selling them for gain, it will be held that such associations are organized for profit and such associations will be required to make returns of annual net income and include therein, for the purpose of the tax, all income derived from such transactions. If amounts paid to members are based solely upon the quantity of produce furnished, such amounts may be deducted from the gross proceeds of sales, and the taxable net income will be the amount of earnings passed to surplus, or distributed or distributable among members on the basis of their stock holdings. (Reg. 33 Rev., Art. 75.) [Page 204.] Federal Reserve Banks. Dividends paid by member banks are not exempt from tax. (Reg. 33 Rev., Art. 86.) CHAPTER 16 INCOME-IN GENERAL [Page 208.] Constructive Receipt of Income. Actual receipt is a reduction to possession. Constructive receipt is where income is credited to or made available to recipients and is to be reported as income; as credit to account of recipients of savings-bank interest, etc. (Reg. 33 Rev., Art. 4.) [Page 211.] Inventory. Under date of December 19, 1917, the Treasury Department altered its long-established rule of permitting inventories on the basis of cost only. In T. D. 2609, issued on that date, it was held as follows: 1. For the purposes of income and excess profits tax returns, inventories of merchandise, etc., and of securities, will be subject to the following rules: A. Inventories of supplies, raw materials, work in process of production and unsold merchandise, must be taken either (a) at cost, or (b) at cost or market price which ever is lower; provided that the method adopted must be adhered to in subsequent years unless another be authorized by the Commissioner of Internal Revenue. B. A dealer in securities who in his books of account regularly inventories unsold securities on hand either (a) at cost, or (b) at cost or market price which ever. is lower, may for the purpose of income and excess profits taxes make his return upon the basis upon which his accounts are kept provided that a description of the method employed shall be included in or attached to the return, that all the securities must be inventoried by the same method, and that such method must be adhered to in subsequent years unless another be authorized by the Commissioner of Internal Revenue. C. Gain or loss resulting from the sale or disposition of assets inventoried as above must be computed as the difference between the inventory value and the price or value at which sold or disposed of. 2. In all other cases inventories must be taken at cost or at value as of March 1, 1913, as the case may be. [Page 215.] Stock Received in Exchange for Property. If a corporation sells its capital assets in whole or in part and the purchase price is paid with stock issued by the purchasing company, the purchase price will be the actual value at the time of the stock issued in payment for such assets. (Reg. 33 Rev., Art. 101.) [Page 216.] Reorganization of Corporations. In a case wherein a corporation acquires from stockholders the stock of another corporation, giving in exchange therefor its own stock, it is held the transaction is one by which the corporation acquiring the stock becomes the sole stockholder of the other corporation. As a result of this transaction no income accrues to the corporation whose stock is thus acquired. Neither will any income accrue to this corporation if later the holding corporation should cause the assets of the underlying company to be transferred to it for mere nominal consideration. If, however, one corporation buys the assets of another and issues direct to the selling company its own capital stock in payment for the assets acquired, the transaction will be treated by the selling company as a sale of its assets, and the question as to whether profit or loss results from the sale will depend upon whether or not the value of the stock taken in payment for the assets is in excess of the fair market price or value as of March 1, 1913, of the assets sold or of their cost accordingly as they were acquired by the selling company prior or subsequent to that date. If the value of the stock is so in excess, the amount of such excess will be taxable income for the year in which the assets were sold and must be so returned. If the excess over value as of March 1, 1913, or over cost, as the case may be, includes any surplus earned since March 1, 1913, upon which the income tax has been paid, the excess or profits resulting from the sale may be reduced by the amount of such tax-paid surplus. If the purchasing corporation takes over all the assets including accounts receivable, bills receivable, surplus, etc., of the selling corporation and assumes its liabilities, the amount so assumed will be considered a part of the purchase price, and to the extent that the entire purchase price exceeds the cost or value, as of March 1, 1913, as the case may be of the assets disposed, income will accrue to the selling company. Rev., Art. 124.) [Page 221.] (Reg. 33 Payment by Warrants. In cases wherein warrants are issued by a city, town, or other political subdivision of a State, and are accepted by the contractor in payment for public work done, the face value of such warrants must be returned as income for the year in which they are received. If, for any reason, the contractor upon conversion of the warrants into cash, does not receive and cannot recover the full face value of the warrants so returned, he may allowably deduct from gross income for the year in which the warrants are converted into cash, any loss sustained, which loss will be measured by the difference between the face value of the warrants returned as income and the amount actually received for them in cash, or its equivalent, when redeemed or disposed of. (Reg. 33 Rev., Art. 108.) [Page 221.] Living Quarters, Board or Lodging. Where service is rendered for stipulated price, wage, or salary and paid with something other than money, the stipulated |