4

no just sense income, but mere conversions of the capital. On the other hand, it has been held that such leases do not constitute a sale of any part of the land and further, that ores or other materials derived from the usual operation of open mines or quarries, constitute the rents and profits of the land. The United States Supreme Court in a case arising under the 1909 Law reviewed the conflicting authorities, and held that under the language of that law royalties received under mining leases were income. In another case the lessee had the right or privilege of removing the ore so long as he saw fit to hold the same without exercising the privilege of cancellation, but nevertheless he was held to be in no legal sense a purchaser of ore in place. Such royalties are treated as income, against which the owner of the property may claim an allowance for depletion of the natural resource.

Royalties from Patents and Copyrights. Taxpayers receiving royalties from patents, copyrights, or other similar forms of property, may deduct from each payment a proportionate part of the cost thereof as representing a return of capital. This is more fully discussed in a subsequent chapter.

6

Royalties Received by Non-Resident Aliens. Royalties paid to non-resident aliens under an agreement of purchase of certain patent rights, the payment being based upon the quantity of goods produced by the use of such patents, are held to be income accruing to non-resident aliens by reason of property owned or business carried on within the United States.7

4 Von Baumbach v. Sargent Land Co., 242 U. S. 503.

5 U. S. v. Biwabik Mining Co., 247 U. S. 116, reversing 242 Fed. 9. 6 Reg. 45, Arts. 45, 163; see chapter 31.

7 T. D. 2137.

CHAPTER 25

INCOME FROM MISCELLANEOUS SOURCES

After specifying a number of sources of income, the act provides that the net income of the taxpayer shall include gains or profits and income derived from any source whatever. In this chapter are set forth the rulings on income from sources not covered by the preceding chapters and on receipts which are not income.

Alimony. Alimony is not income, as it does not arise from any business transaction, and is not founded on any contract, but on the natural and legal duty of the husband to support the wife. It follows that the husband. cannot deduct the amount he pays as alimony from his income for the purpose of the tax.

Accident, Health or Workmen's Compensation Insurance. Amounts received through accident or health insurance or under workmen's compensation acts as compensation for personal injuries or sickness are exempt from income tax and the amount of any damages received, whether by suit or agreement on account of such injuries or sickness is also exempt.3

1 Revenue Act of 1918, § 213 (a).

2 Gould v. Gould, 245 U. S. 151. This decision reversed the ruling of the Treasury Department on the point.

3 Revenue Act of 1918, § 213 (b) 6. Money paid to a person insured by an accident insurance policy on account of accident was first considered income (to the extent that the amount exceeded the aggregate premiums paid) but amounts received from a railroad company, by way of reimbursement for expenses incident to an accident were not income. But these rulings were revoked and it was held in pursuance of an opinion of the Attorney General based upon Doyle v. Mitchell Brothers, 247 U. S. 179, affirming

Assessments on Stock. Assessments paid by stockholders on stock are not income of the corporation, nor is a voluntary contribution on the part of the stockholders, to make good a deficit of the corporation. Such payments are simply an addition to the capital stock of the company.4

Cancelled Debts. Cancellations of debts do not ordinarily create income to the debtor.5 The rule might be otherwise, however, in case the cancellation was in consideration of services rendered, since the law provides that compensation for personal services, in whatever form paid, is income.

Allocation of Income from Judgments. Lands which are received as compensation for services in one year, the title to which is disputed and in a later year adjudged to be valid, constitute income to the grantee in the former year. On the other hand, a person may sue in one year on a pecuniary claim or for property, but money or property recovered on a judgment therefor rendered in a later year would be income in that year, assuming that it would have. been income in the earlier year if then received. In general, a judgment for the plaintiff may produce income; a judgment for the defendant usually does not. However, money paid by a debtor to a receiver, pending determination as to which of two or more claimants other than the debtor is entitled to it, is to be treated as income of the successful claimant in the year when paid to the receiver. Bad debts or accounts charged off because of the fact that they were determined to be worthless and subsequently recovered, whether or not by suit, constitute income for the

235 Fed. 686, Lynch v. Turrish, 247 U. S. 221, and Southern Pac. Co. v. Lowe, 247 U. S. 330, that the proceeds of accident insurance policies received by an individual on account of injuries sustained by him through accident were not income under the 1916 Law as amended (T. D. 2747).

4 Letter from Treasury Department dated February 21, 1916; I. T. S. 1918, ¶ 1291.

5 U. S. v. Oregon-Washington etc. Co., 251 Fed. 211.

year in which recovered, regardless of the date when the amounts were charged off.6

Damages. The amount of any damages received, whether by suit or agreement, on account of personal injuries or sickness, is exempt from income tax.7

DAMAGES FOR PROPERTY LOST OR DESTROYED. It was held generally under the 1916 Law that when an individual, partnership or corporation as a result of suit or otherwise secured payment for damages which it might have sustained, and the amount of such payment exceeded an amount necessary to make good the damage or damaged property, the amount of such excess was considered income for the year in which received. If the entire or an estimated amount of the damage had been previously charged off and deducted from gross income, then the amount recovered was to be returned as income. If the amount recovered was less than the damage sustained or less than an amount necessary to make good the damage, the difference between the actual amount of damage sustained and the amount recovered was deductible as a loss.8

Compensation for Property Requisitioned or Lost or Destroyed Through War Hazards. The ruling mentioned in the previous paragraph was later modified as follows: In the case of property, title to which has been requisitioned for war uses, or property which has been lost or destroyed in whole or in part through war hazards, the amount received by the owner as compensation for the property may show an excess over the value of the property on March 1, 1913, or over its cost if it was acquired after that date. This excess of the amount received over the value or cost of the property, except so far as actually used for the replacement of the property in kind, is sub

6 Reg. 45, Art. 46.

7 Revenue Act of 1918, § 213 (b) 6. Under the 1916 Law amounts received as the result of a suit or compromise for "pain and suffering" were at first held to be income. (T. D. 2135). This rule was subsequently revoked. (T. D. 2747).

8 Reg. 33 Rev., Art. 94, as modified by T. D. 2706.

ject to the income, war income and excess-profits taxes. Although the intention or obligation of the taxpayer in such case may be to use the entire sum received as compensation for the replacement in kind of the lost or damaged property, it is recognized that it may not be practicable, owing to war conditions, to make such replacement for a considerable time. In such case, the taxpayer may establish a "replacement fund" in which the entire amount of the compensation so received shall be held, and pending the disposition thereof, the accounting for gain or loss thereupon may be deferred for a reasonable period of time to be determined by the Commissioner. Where the property requisitioned, lost or damaged constituted all or part of the security under a mortgage or trust indenture, the amount carried to the replacement fund may, subject to the approval of the Commissioner, be the amount of com · pensation received less the amount, if any, which becomes payable out of such compensation under the terms of such instrument or the obligation thereby secured.

This ruling was later extended to embrace other losses, as follows: Loss or Damage Recovered. In the case of property which has been lost or destroyed in whole or in part through fire, storm, shipwreck, or other casualty, or where the owner of property has lost or transferred title by reason of the exercise of the power of requisition or eminent domain, including cases where a voluntary transfer or conveyance is induced by reason of the fact that a technical requisition or condemnation proceeding is imminent, the amount received by the owner as compensation for the property may show an excess over the value of the property on March 1, 1913, or over its cost, if it was acquired after that date (after making proper provision in either case for depreciation to the date of the loss, damage, or transfer). The transaction is not regarded as completed at this stage, however, if the taxpayer proceeds immediately in good faith to replace the property, or if he makes application to estab

9 T. D. 2706, modifying Reg. 33 Rev., Art. 94; and T. D. 2733.