Endowment Policies. Where an endowment policy is paid to the insured, it is exempt from tax to the extent that the payment represents a return to the insured of amounts paid by him from time to time as premiums, but is taxable on the excess. Thus, if over .6 a period of years the insured has paid $700 in premiums. and, at the expiration of the term receives $1,000 from the insurance company, $300 of that sum is taxable income, but the $700, representing return of premiums, is not income.

Annuities. So much of annuities paid to an annuitant as represents payment made by him on the annuity contract, is not taxable income. Any increment on the purchase price of the annuity is taxable income." The Treasury Department has not prescribed any rules for determining what part of each payment of an annuity is income and what part represents return of principal. In the case where one has purchased a life annuity it seems the annuitant should be permitted to deduct annually a part of the purchase price determined perhaps by dividing the total purchase price of the annuity by the number of years of his expectation of life, as shown by the insurance mortality tables, at the time of purchase. Thus if the expectation of life is fifteen years, the purchase price should be divided by fifteen and only so much of the annuity as exceeds this sum each year can reasonably be said to be income to such annuitant.

Matured Shares in Building and Loan Association. Where the amount paid back to a depositor by a building

6 T. D. 2090, as amended by T. D. 2152.

7 Letter from Treasury Department dated January 12, 1914; I. T. S. 1917, ¶ 306.

F. I. Tax.-19

or loan association, at the maturity of the series, exceeds the aggregate deposits made to that series, only the difference between the total amount received for the surrender of the matured certificate and the aggregate of the deposits made by the certificate holder, is to be returned as income.8

Compensation by Insurance. Insurance money is clearly a substitute for the assets lost or destroyed. The money so received from the insurance company is not income, but a direct compensation for the property lost, and it is expressly provided by the law that no loss can be claimed for property destroyed when such loss is compensated for by insurance.9

Timberlands.

The value of timberlands at the incidence of the tax may be deducted pro-rata as the lumber is cut and sold in that such value represents the capital of the owner.10 The Treasury Department has published several rulings describing the procedure to be followed in claiming annual allowances for the return of capital in the case of owners of timber properties, which are summarized in the following paragraphs.

BASIS OF ALLOWANCE. Owners of timberland logging off the timber and manufacturing it into lumber will be permitted to exclude from gross income, either through a deduction from gross receipts or through a charge into the cost of manufacturing the timber into lumber, an amount equivalent to the fair market price or value of

8 Letter from Treasury Department dated February 8, 1917; I. T. S. 1917, ¶ 2000.

9 Act of September 8, 1916, §§ 5 and 12.

10 Doyle v. Mitchell, 235 Fed. 686.

the standing timber as of March 1, 1913, if the property was acquired prior to that date or the actual cost, that is, the gross purchase price of the timber property, if purchased subsequent to that date.11

FAIR MARKET VALUE AS OF MARCH 1, 1913. The fair market value of timber or timberlands as of March 1, 1913, is the price at which the property, in its then condition and with the circumstances then surrounding it, could have been sold for cash or its equivalent. The value must not be speculative, but must be determined without taking into account any prospective profit that may result from the manufacture of the timber into lumber. It must be as the law contemplates, a fair market value, and, once determined, must be set up on the books. As the measure of a stumpage deduction for income tax purposes, it must remain constant and cannot be increased. The department does not specifiy any particular method of arriving at the fair market price or value as of March 1, 1913, but requires the owner to determine the amount which, in his opinion, is the fair market price or value as of that date, and to calculate his deduction on that basis. The amount so determined by the owner will be given due consideration, and, if at a later date it appears to the Treasury Department that it does not represent the fair market price or value, the owner will be advised and be given an opportunity to present reasons and facts as to why the figures should be accepted.

GROSS PURCHASE PRICE. If the property is purchased subsequent to March 1, 1913, the Treasury Department

11 Letter from Treasury Department dated March 3, 1917; I. T. S. 1917, ¶¶ 2164 and 2165.

will allow, as the basis of the annual deduction, an amount representing the original cost of such timber plus any carrying charges that may have been capitalized or not deducted from income, the purpose being to secure to the owner, when the timber has been exhausted, an aggregate amount which, plus the salvage value of the land, will equal the capital actually invested.12

After

PROCEDURE IN CLAIMING ANNUAL ALLOWANCE. determining the value of the property as of March 1, 1913, or its cost, if purchased subsequent to that date, the number of feet (board measure) in the entire timber holdings should be estimated. By dividing the original cost or value by this number, the per unit value or price will be ascertained. This per unit value multiplied by the number of feet of timber removed each year will measure the annual deduction, which may be made until the aggregate amount equals the amount of capital invested. When the capital has been so extinguished, the entire amount thereafter realized from the logged off lands, or from other salvage, will be returned as income of the year in which the timber or the lands are sold or disposed of. If the timber or timberlands are sold en bloc the gain or loss will be ascertained on the basis of the difference between the fair market price or cost (less any amounts which have been deducted as return of capital) and the selling price, according as the property was acquired before or after March 1, 1913.13

Instalment Payments. Where real estate is sold on a monthly instalment basis under a contract which vests

12 Reg. 33, Arts. 139 and 140.

13 Letter from Treasury Department dated March 3, 1917; I. T. S. 1917, ¶¶ 2164 and 2165.

possession of the property in the vendee, but explicitly retains title in the vendor and provides for reversion to him in case of default on the terms of the contract, it has been held that every dollar received under the contract represents in part a return of a portion of the cost of the property to the vendor and in part a portion of the total profit to be derived from its sale, and that the amount of profit represented should be taken into consideration in computing gain or profit during the year for income tax purposes. Thus, where the cost of the property is $250 and is sold for $450, four-ninths of the selling price represents the profit and that fraction of each instalment payment should be returned as gross income, against which the vendor may claim allowable deductions. If under the terms of the contract a default in payment occurs, and the vendor retains all payments received, as liquidated damages, the vendee losing all right and title to the property and to the amount of payments made, the entire amount theretofore received and treated as a return of capital, should be included as income for the year during which the default occurs.14 This seems to be a logical method to follow in every case of payments by instalment for goods or property sold in the ordinary course of business, as it distributes the income over the entire period during which payment is being made. On the other hand, the selling-price may be treated as a receipt in the year in which the goods are sold, subsequent instalment payments being treated as partial payments of debts and unpaid instalments being treated as worthless debts in the year they are ascertained to be a loss. The segregation of capital and income in each instalment payment has the advantage,

14 Letter from Treasury Department dated March 14, 1917; I. T. S. 1917, ¶ 2215,