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Federal Reserve Banks. The income of Federal Reserve Banks is exempt from income tax by express provision in the Federal Reserve Act.26 The dividends on the stock of such banks are exempt from tax in the hands of member banks. 27

26 Federal Reserve Act, 38 Stat. 251, Ch. 6, $ 7. 27 Federal Reserve Bulletin, April 1, 1916

CHAPTER 16

INCOME-IN GENERAL

A discussion of the various conceptions of income would be interesting but is out of place in a work of this character. For all practical purposes it is sufficient to state that the income which is taxable under the present laws is defined in the statute. One conception of income excludes gains or increment in the value of capital assets, but this conception was not that of Congress, since the tax is not only upon income conceived as a production of capital, but also upon gains and profits derived from sales or dealings in property, growing out of the ownership or use of or interest in property or from gains or profits from any source whatever. For the purpose of discussion in this and the following chapters, the general rules and principles applicable to income from all sources will first be described, and thereafter, the special rules applicable to income from personal services, income from farming, income from business, trade and commerce, income from dividends, income from interest and rent, and income from miscellaneous sources. The special rules relating to income from partnerships and income from fiduciaries are treated in the chapters on those respective subjects.

What Constitutes Income. The word "income" as used in revenue legislation has a settled legal meaning. The courts have uniformly construed it to include only the receipt of actual cash as opposed to contemplated revenue due but unpaid, unless a contrary purpose is manifest from the language of the statute. What was taxed by the 1909 Law was "net income received," not income, accruing or accrued, which had not been received and portions of which might never be received. While the phrases “income received” and “income accrued” are frequently used in the same statute, the courts have not departed, unless it expressly appears otherwise, from a construction of the law in accord with an intention to reach the actual and not the potential income. In the 1913 Law the two preceding phrases were employed. Doubtless it was the intention of Congress to employ terms of sufficient comprehension to reach the actual income by foreclosing any possible avenue of escape, but it can hardly be said that in so doing an intention prevailed to tax that which did not actually exist, except on paper, as income accrued during the taxing period. One cannot be said to receive an income of defined proportions until he balances receipts and deductions at the end of a stated period and ascertains, 'not what is due, but what has been actually received. The assets and liabilities may be measured by a different rule of accounting, but income as defined by the courts means, as said in United States v. Schillinger,1 "in the absence of any special law to the contrary, income must be taken to mean money, and not the expectation of receiving it or the right to receive it at a future time." 2 In the 1916 Law the phrase "income received” is used with respect to both individuals and corporations.3

1 14 Blatch. 71. 2 Maryland Casualty Co. v. U. S., Ct. Cls., T. D. 2-151. 3 The language of the 1909 Law was also held to indicate that

Actual Receipts. The 1916 Law intends primarily to tax individuals and corporations upon the income received, and not that which has arisen or accrued, but has not been received. This basis of actual receipts is not exclusively prescribed, since both individuals and corporations may, if they so choose and the Commissioner of Internal Revenue permits them, report their net income on the basis of accruals instead of actual receipts. This provision is more fully discussed in subsequent paragraphs of this chapter. If the taxpayer does not elect to report on such basis, or is not permitted to do so by the Treasury Department, the tax must be computed on the basis of actual receipts. An early ruling of the Treasury Department, under the 1913 Law, holding that a person receiving fees or emoluments for professional services must include all actual receipts for services rendered in the year for which the return was made, together with all unpaid accounts, charges for services or contingent income due for that year, was discussed in the case of Edwards v. Keith, and the court said: "No such construction of the Treasury Department can enlarge the scope of the statute so as impose the tax upon unpaid charges for professional services rendered, which for aught anyone can tell may never be paid. The statute alone determines what is income to be taxed. It taxes only income derived from many specified sources, and one does not derive income by rendering services and charging for them.” Accrued the net income, which was the measure of taxation, meant what had actually been received and not that which, although due, had not been received, its payment for any reason having been deferred or postponed. (Mutual Benefit Life Insurance Company V. Herold, 198 Fed. 199.)

4 Act of September 8, 1916, $1 and $ 10. 5 231 Fed. 110.

but unpaid interest on investments has been held not to be income. Under the broader language of the 1909 La , it was held that income was taxable only to the extent that it was actually received during the year, and did not include items which had been earned, or become due, but had not been collected. It was also held under that law that items of "non-ledger assets” shown in the annual report of a life insurance company, made in pursuance to a state statute as “uncollected and deferred premiums" and interest due and accrued,” but no part of which had been received, were not a part of the company's “income received during such year.” 8

Bookkeeping Entries. Real facts and not bookkeeping entries constitute income. This does not mean that the return of net income should not be made in accordance with the taxpayer's books, for ordinarily the books reflect the real or actual facts. for instance, that if the taxpayer is reporting on the basis of actual receipts and disbursements, the entry of charges not yet collected will not make him taxable thereon. In brief, the taxpayer is not precluded, by the entries in his books of account, from reporting his income according to actual facts, nor on the other hand is the Government precluded from going behind the taxpayer's books and assessing the tax on the actual facts. In some instances the law places a determining importance on

It means,

6 Insurance Company of North America v. McCoach, 218 Fed. 905.

7 Connecticut Mutual Life Insurance Co. v. Eaton, 218 Fed. 206. 8 Connecticut General Life Ins. Co. v. Eaton, 218 Fed. 188.

9 Mitchel Brothers v. Doyle, 225 Fed. 437; U. S. v. Nipissing Mines Company, 202 Fed. 803; Baldwin Locomotive Works v. McCoach, 215 Fed. 927; U. S. v. Guggenheim Exploration Company, 238 Fed. 231.

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