ties, and the cost thereof has not been claimed as an item of expense, the actual purchase price of such stock, less any depreciation which may have been claimed, may be deducted as a loss. Property destroyed by order of state or federal authorities may be claimed as a loss. If reimbursement is made by the state or federal authorities, in whole or in part, on account of the destruction of stock or property, the amount so received is to be reported as income. The cost of ordinary tools may be deducted as an expense, but not the cost of farm machinery. Depreciation may be claimed on farm machinery and on farm buildings (except the dwelling occupied by the owner) and other physical property, including stock purchased for breeding purposes. No claim for depreciation will be allowed on stock raised or purchased for resale, as the cost thereof may either be deducted as an expense or taken into account at the time the stock is sold. These deductions are discussed in detail in the several chapters on deductions.2

2 See Chapters 20 to 32, inclusive.

CHAPTER 20

INCOME FROM SALES OR 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 real or personal property, shall be taxable.1 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 law is broad enough to cover all transactions whether or not the taxpayer is a dealer. The case of Gray v. Darlington 2 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 a comparison of the statute under which the case was decided with the 1913 and 1916 Laws leads to the conclusion, on the part of the author, that the case has no application to the language of the later

1 Act of September 8, 1916, § 2 (a). 215 Wall. 63; 21 L. Ed. 45.

statutes. The intent of the 1913 Law and the 1916 Law 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.5

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. If improvements or betterments have been made the cost of such improvements or betterments may also be added to the cost of the property. It is also permissible to add to the initial cost of the property such carrying charges as interest, taxes, insurance, etc., provided such carrying charges have not been deducted

3 Under the 1909 Law, it was held that the profit from the sale of stock purchased in 1902 and sold in 1911 was not income to any extent whatever, the court following the case of Gray v. Darlington. Gauley Mountain Coal Company v. Hays, 230 Fed. 110. The Darlington case was also followed in Industrial Trust Company v. Walsh, 222 Fed. 437, in holding that an increase in the book value of property did not constitute income under the 1909 Law. Other cases held the profit taxable. The case of Gray v. Darlington is more fully discussed in Chapter 43 on the constitutionality of the present law.

4 T. D. 2090; T. D. 2137.

5 T. D. 2090; letter from Treasury Department dated August 14, 1914; I. T. S. 1917, ¶ 262.

6 T. D. 2090.

from net income in any annual return of the owner subsequent to the income tax.7

PROFIT NOT BASED ON BOOK VALUES. The value 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.8

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.9

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 ascer

7 T. D. 2137.

8 U. S. v. Guggenheim Exploration Company, 238 Fed. 231.

9 Letter from Treasury Department dated February 26, 1916; I. T. S. 1917, ¶ 280.

tain 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.10

RULE AS TO FARMERS. The cost of stock purchased for resale may be deducted by a farmer under the item of expense in the year in which the stock is purchased.11 This, however, is not an absolute requirement, since a farmer may purchase stock to such an extent that the cost would more than offset his income for the year. He may therefore treat the amount paid for stock in the same manner as the cost of any other property, that is, make no deduction at the time of purchase, but deduct such cost from the selling price at the time of sale and report only the remainder as profit. Money expended for stock for breeding purposes is regarded as capital invested and such sums may not be deducted as expense in the year in which the stock is purchased. The amount so paid for stock for breeding purposes may be taken into consideration under the head of depreciation, that is, the total sum paid may be divided by the number of years in which

10 T. D. 2161. 11 T. D. 2153.