is taxable as income of the seller. If the property was received as a gift prior to March 1, 1913, its value on that date would be so deducted.

Recoveries on Bad Debts. Where a bad account has been charged off to profit and loss and subsequently the money is recovered, the sum so recovered must be treated as income whether or not the bad debt was charged off prior to the incidence of the tax or subsequent thereto. The fact that a bad debt has been charged off prior to the incidence of the tax does not make it any the less income for the year in which it is recovered.26

Rights to Subscribe to Stock. Where a stockholder acquires the right to subscribe to new stock of the corporation and sells that right, the amount received is considered as income.27 If he exercises the right, no income accrues until the stock subscribed for is sold.

Stock Received as Bonus. Where common stock is received as a bonus in consideration of the purchase of preferred stock, the common stock has no taxable status. The entire proceeds derived from the sale or transfer of such stock is income subject to the normal and surtax.28

Sale of Bonds at Premium. If bonds are sold at a premium, the premium must be reported as income.29

Dividends on Life Insurance Policies. Dividends paid. on life insurance policies that have not matured, whether or not such dividends are drawn in cash by the insured or applied to the reduction of the annual premium due, are not considered items of taxable income. Dividends from paid-up policies, however, are considered income. The former represent merely a return of a part of the premium theretofore paid by the insured, while the latter represent a distribution of income earned by the insurance com

26 Letter from Treasury Department dated February 11, 1916; I. T. S. 1918, ¶ 1211; Reg. 45, Art. 46.

27 Letter from Treasury Department dated February 27, 1915; I. T. S. 1918, 420; Reg. 45, Art. 36.

28 Reg. 33 Rev., Art. 4.

29 Reg. 33 Rev., Art. 150.

panies on the premiums paid by the insured, and, when paid to the insured, should be treated the same as dividends from corporations.30

Surrender Value of Insurance Policies. When an insured person discontinues insurance prior to the maturity of his policy, he is entitled to a certain surrender value which is paid to him by the insurance company.

amount so received represents the return to the insured of a part of the premiums he has paid in the past, and is therefore not income. If the amount should exceed the aggregate of premiums paid, the excess would be taxable income 31

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.32 Thus, if over 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. The Revenue Act of 1918 provides that the amount received by the insured as a return of premiums paid by him under life insurance, endowment or annuity contracts either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract is exempt from taxation.33 Under the 1913 Law it was held that the amount by which the sum received exceeded the sum paid and coming into the hands of the person making the contract and payment was income. It was also first held that "when the settlement under such contract and payment is made in more than one payment each payment will be considered as being composed of interest

30 T. D. 2137.

31 Reg. 45, Art. 44, T. D. 2090; T. D. 2152; Letter from Treasury Department dated February 8, 1917, I. T. S. 1918, ¶424.

52 Reg. 45, Art. 44, T. D. 2090; T. D. 2152.

33 Revenue Act of 1918, § 213 (b) 2.

and a proportionate part of the principal," and "where the entire annuity is composed of an interest return upon the principal sum paid therefor, the entire annuity is income." 34 The matter quoted, however, was afterward stricken out of the ruling.35 The present ruling is as follows: Annuities paid by religious, charitable and educational corporations under an annuity contract are subject to tax to the extent that the aggregate amount of the payments to the annuitant exceeds any amounts paid by him as consideration for the contract. An annuity charged upon devised land is income taxable to the annuitant, whether paid by the devisee out of the rents of the land or from other sources. The devisee is not required to return as taxable income the amount of rent paid to the annuitant, and he is not entitled to deduct from his taxable income any sums paid to the annuitant. Where an insured receives under life insurance, endowment or annuity contracts, sums in excess of the premiums paid therefor, such excess is income for the year of its receipt.36

Matured Shares in Building and Loan Association. Where the amount paid back to a depositor by a building 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.37

Compensation by Insurance. Insurance money is clearly a substitute for the assets lost or destroyed. If the insurance money is in excess of the cost of the property it may be used to restore the property or be placed in a fund for that purpose for a reasonable time until restoration can be made, final accounting for tax on the excess over the

34 T. D. 2090.

35 T. D. 2152.

36 Reg. 45, Art. 44.

37 Letter from Treasury Department dated February 8, 19** I. T. S. 1918, ¶ 310.

amount expended to replace or restore the property substantially in kind, being deferred until the restoration or replacement has taken place. The rulings on this point are stated above.

CHAPTER 26

DEDUCTIONS-IN GENERAL

In computing the net income of an individual or a corporation certain deductions are specified in the law.1 While the deductions allowed both corporations and individuals are based upon the same principles, they vary in some particulars, due to differences in the status of the two classes of taxpayers. Thus, an individual may deduct charitable contributions or gifts made within the taxable year, while no corresponding deduction is allowed to corporations. The separate provisions made in the case of individuals for the deduction of losses sustained in any transaction entered into for profit though not connected with trade or business, and losses of property not connected with trade or business, if arising from fires, storms, etc., have no counterparts in regard to corporations, since all losses of a corporation may be deducted. Certain special deductions are allowed in the case of insurance companies which are not necessary in the case of individuals and other kinds of corporations.2 Dividends from a corporation which is taxable upon its net income, and from a personal service corporation out of earnings or profits upon which income tax has been imposed are allowed as a deduction to corporations and to individuals only as a credit for the purpose of the normal tax. The general effect of the Revenue Act of 1918, as compared with the 1916 Law is to place individuals and corporations more nearly upon

1 Revenue Act of 1918, §§ 214 and 234.

2 These deductions are specially treated in Chapter 13 on Insurance Companies.