value of service in terms of money is the value at which the thing taken in payment is to be considered for the purpose of the income tax.

Where there is no stipulation as to the value of service and payment for service is made with something other than money, the market or reasonable value of the thing taken in payment is the amount to be included as income for the purposes of the income tax. (Reg. 33 Rev., Art: 4.)

[Page 223.]

Income Taxable in Year Received. In the case of compensation for service rendered, where no determination of compensation is had until the completion of the service, the amount received in consideration of the service is income to be accounted for as for the calendar year of its receipt.

Where the service and payment period is divided by the end of the taxable year, the compensation for the period so divided at the end of the year will be accounted for as income for the year in which payment is actually received. Where the service is compensated by fee, or is of such nature that no part of the fee or compensation becomes due until the completion of the service, the entire amount received. should be income to be accounted for as for the year of receipt.

A person having a salary by the year and in addition commissions on sales, the salary to be paid at the time commissions are determined, and the determination of commissions is in the succeeding calendar year, the entire amount of salary and commission should be accounted for as income of the calendar year of receipt. (Reg. 33 Rev., Art. 4.)

[Page 226.]

Exempt Income. Where the entire income of an individual is from tax-exempt bonds and where the amount of income other than that from tax-exempt securities is less than the amount of income for which a return is required, no return of income is to be made. Interest from securities which is exempt from tax under section 4 of the Income Tax Law is not to be included in returns of income. (Reg. 33 Rev., Art. 26.)

[Page 228.]

"Paid" or "Actually Paid." "Paid" or "actually paid," within the meaning of this title, does not necessarily contemplate that there shall be an actual disbursement in cash or its equivalent. If the amount involved represents an actual expense or element of cost in the production of the income of the year, it will be properly deductible even though not actually disbursed in cash, provided it is so entered upon the books of the company as to constitute a liability against its assets, and provided further that the income is also returned upon an accrued basis.

If in the course of its business, a corporation credits the accounts of individuals, firms, or corporations with the amount of any expenses, interest, rentals, wages, etc., due them, thereby making them subject to the personal drawings of such creditors, or if expenses actually incurred are vouchered in definite amounts, the amounts so credited or vouchered may be treated as paid, and if the amounts so credited or vouchered are expenses incurred concurrently with and in the production of the income of the year, they may be allowably deducted therefrom.

This ruling must not be construed to allow as a F. I. Tax Supp.-3

deduction any accrued charges which if paid in cash or otherwise would not be deductible. (Reg. 33 Rev. Art. 126.)

Approved Accounting Practices. Pursuant to the foregoing provision, corporations keeping their accounts in strict accord with the methods prescribed by municipal, State, or Federal authorities, or in accord with approved standard accounting practices consistently followed from year to year, will be permitted to make their returns of annual net income on the basis of the accounts so kept, provided such systems of accounting clearly and correctly reflect the net income of each year.

Charged Against Current Earnings. All expenses, including interest, taxes, and other necessary charges, incidental and necessary to the creation or production of the gross income or properly chargeable against the same, being deductible from the gross income, whether paid in cash or entered on the books as a liability, can not, if unpaid, be carried forward to be deducted from the gross income of a subsequent year.

Each Year's Return Complete. Each year's return, both as to income and deductions therefrom, must be complete within itself. Charges, of whatever character, against income can not be cumulative. They must be deducted from the income of the year in which incurred or not at all. The expenses, liabilities, or deficit of one year can not be used to reduce the income of a subsequent year.

The deductions must in all cases be such as are authorized and within the limits fixed by law. (Reg. 33 Rev., Art. 127.)

Previous Year's Charges Not Deductible A corporation having the right under this rule to deduct all au

thorized allowances, whether paid in cash or set up as a liability, it follows that if it does not within any year pay or accrue certain of its expenses, interest, taxes, or other charges, and makes no deduction therefor, it cannot deduct from the income of the next or subsequent year any amounts then paid in liquidation of the previous year's liabilities.

Amended Returns. If, however, a corporation discovers or detects expenses or liabilities which were due and payable during a preceding year, it will be permissible for it to make an amended return for the year to which such expense or liability applies, include 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.

Any system of accounting which is not consistent with the purpose and intent of the rules set out in this title, and with the general rules set out in these regulations for the ascertaining of net income, will not be accepted as a correct basis for making returns. (Reg. 33 Rev., Art. 128.)

[Page 233.]

CHAPTER 17

INCOME FROM PERSONAL SERVICES

Per Diem Allowance. The total allowance is income and there may be taken as a deduction for expense, the amount actually expended from such allowance for actual necessary traveling expenses. (Reg. 33 Rev., Art. 8.)

[Page 234.]

Compensation of Officers and Employees of a State or Political Subdivision Thereof. An individual who enters into a contract with a State, or any political subdivision thereof, for the doing of a thing or things specified by the contract, the completion of which will constitute a fulfillment of the contract on the part of such individual, is not an officer or employee of the State or political subdivision thereof within the meaning and intent of section 4 of the income tax law and the amount received by him from the State or political subdivision thereof under the terms of the contract is to be accounted for as income. (Reg. 33 Rev., Art. 4.)

CHAPTER 18

INCOME FROM BUSINESS, TRADE OR COMMERCE [Page 237.]

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 that inventories should be taken at cost or market value which ever was the lower. The complete text of this T. D. appears on page supra.

[Page 238.]

Income of Contracting Companies. Corporations engaged in contracting operations and which have numerous uncompleted contracts, which in some cases run for periods of several years, will be allowed to prepare their returns so that the gross income will be arrived at on the basis of completed work-that is,