the stock is expected to live, or be useful for the purposes for which bought, and the resulting sum may be deducted from each year's income. Should such stock be sold at any time, the cost thereof, less the aggregate amount which has been so claimed as depreciation, may be deducted from the selling price, the remainder, if any, constituting income.

When an individual

PROPERTY LEFT BY A DECEDENT. dies after March 1, 1913, leaving property, all gains or losses on subsequent sales should be computed on the basis of the appraised value of the property at the date of death of the former owner. Neither the executors nor anyone acquiring the property of the decedent is required to make a return of the book gains or losses up to the date of death. If the executors should sell the property the difference between the appraised value at the date of death and the selling price constitutes the taxable profit. If the property is transferred to a beneficiary of the estate no income accrues to the beneficiary as a result thereof, since the value of property acquired by gift, bequest, devise or descent is exempt from tax. Any income which the beneficiary thereafter derives from such property is taxable and, if such property is sold, the difference between the appraised value of the property at the date of decedent's death and the selling price constitutes the taxable profit.12 In cases where an individual died prior to March 1, 1913, the value on March 1, 1913, of any property left by the decedent is the amount to be used as a basis for computing the taxable profit in any subsequent sale by the executors or the beneficiaries.

12 Telegram from Treasury Department dated February 3, 1917; I. T. S. 1917, ¶ 1999.

Property Acquired Before March 1, 1913. The 1916 Law provides that for the purpose of ascertaining the gain derived or loss sustained from the sale or other disposition of property, real, personal, or mixed, acquired before March 1, 1913, the fair market price or value of such property as of March 1, 1913, shall be the basis for determining the amount of such gain derived or loss sustained.13 This provision applies in all cases of individuals and corporations. In all such cases the original cost of the property is disregarded and the value as of March 1, 1913, is taken, whether or not such value is more or less than the original cost.14 Under the 1909 and 1913 Laws it was the practise of the Department to require the taxable profit to be determined by first ascertaining the difference between the cost and the selling price and then pro-rating the result according to the number of months the property was held before and after the incidence of the tax, but this rule has no application under the present laws.

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

13 Act of September 8, 1916, § 2 (c), § 5 (a), § 6 (a), § 10. 14 This provision first appeared in the 1916 Law, no reference being made in the 1909 Law or the 1913 Law as to assets acquired prior to the incidence of the tax. In one case under the 1909 Law it was held that profit on the sale of property purchased prior to January 1, 1909, and sold thereafter was income only to the extent that the selling price exceeded the ascertained market value on January 1, 1909. (Cleveland, etc., Railway Company v. U. S., 242, Fed. 18.) In another case it was held that where the assets were acquired for the purpose of sale, the inventory value at the time of the incidence of the tax should be the basis. (Doyle v. Mitchell, 235 Fed. 686; 149 C. C. A 106.)

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.15

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.16 This ruling has no application under the 1916 Law, 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 for the property. It may be held to be taxable whether received in cash or in the equivalent of cash. For a discussion of income received in the equivalent of cash, see chapter on income in general.17

15 Letter from Treasury Department, dated November 21, 1916; I. T. S. 1917, ¶ 273.

16 T. D. 2130.

17 See Chapter 16.

CHAPTER 21

INCOME FROM RENT

Rent is returnable as income in the year in which it is received, and not necessarily in the year in which it becomes due. Thus, where a tenant pays part of his rent for the preceding year on the second day of January of the following year, the amount so paid is income to the landlord for the year in which it is received, and not the year which it covers.1 This rule, however, is not absolute, as the landlord may, if he keeps his books accordingly, report the rent for the year in which the income accrues and charge against it the deductions for the same period.

Value of Improvements Made by Tenant. Where, under the terms of a rental or lease contract, a tenant agrees to erect a building or to expend during the rental period a certain fixed sum in making improvements upon the freehold of the lessor, it is held for income tax purposes that the building or permanent improvement becomes a part of the realty unless otherwise agreed between the contracting parties; and, as such, must be accounted for as gain or profit to the lessor at the time the lease is terminated, whether terminated by expiration or otherwise. The amount

1 Letter from Treasury Department dated February 9, 1915; I. T. S. 1917, ¶ 226.

of the gain or profit to the lessor at the termination of the lease is the difference between the cost of the building or improvement so made by the tenant and a reasonable allowance for depreciation during the period of its life under the lease.2

Lessor Corporations. Where a corporation leases all of its property to another and specifies that the consideration therefor shall be paid direct to its stockholders and bondholders or creditors the lessor corporation is, nevertheless, held to be the proper recipient of the income and must report, as rent, the amount so paid to its stockholders, bondholders or creditors by the lessee.3

Payments by Tenant on Behalf of Landlord. Where under the terms of a lease a tenant pays taxes or interest, or makes any other payments for and on behalf of the landlord, the amount of such payments constitutes income to the landlord and should be reported by him as such. The theory covering these transactions is that the tenant is acting merely as agent for the landlord in making such payments. The expenses are the landlord's, which he may deduct from his net income, and the amounts used to defray such expenses must be included by the landlord as his net income. Such payments may be deducted by the tenant as rent in the year in which they are paid.

2 T. D. 2442. It necessarily follows that the tenant may consider the cost of the building as a part of his rental payments and may deduct such amount as an expense, pro-rating the original cost over the number of years constituting the term of the lease. See Chapter 28.

3 For a further discussion of this subject see sub-heading entitled Lessor and Lessee Corporations in Chapter 12.