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under Sec. 211 (a) (2), would be $197,760. The portion of this amount attributable to the sale of the mine would be 450,000, or $196,190.48. The statute provides, however, that 453,600 the portion attributable to the sale of the mine shall, in 1922, not exceed 16% of the selling price of the mine. The selling price in this case was $600,000, 16% of which is $96,000. The result first arrived at above must therefore be reduced on this account by the excess of $196,190.48 over $96,000, a reduction of $100,190.48, leaving a balance of $97,569.52, which is the total surtax.

REFERENCE:

Sec. 211 (b) (Quoted under Problem 58)

QUESTION (B)':

Assume that the mine purchased by Mr. Colvin was acquired by him to be held for investment. Would Mr. Colvin under the circumstances be permitted to avail himself of the option of computing his taxes under section 206 as in the case of "capital net gain?"

ANSWER:

As the mine was not held by Mr. Colvin for more than two years, it is not regarded as a "capital asset" as defined in paragraph (b) of section 206 (quoted under Problem 58).

PROBLEM 58

Illustrating Limitations of Tax in Sale of Mine in 1922, the
Principal Value Thereof Being Demonstrated by Pros-
pecting or Exploration and Discovery Work Done
by the Taxpayer-Computation Under Pro-
visions Relating to Capital Gain Re-

sulting in Tax Lower than if Compu-
tation is made under Provisions

Relating to Sale of Mine

FACTS:

James W. Allen, a citizen of the United States, sells a mine in 1922 for $1,000,000, which in 1910 had cost him $200,000. The March 1, 1913, value of the mine was $250,000, but subsequent discoveries by Mr. Allen proved the mine to be worth the amount for which it was later sold. The mine had never been operated and consequently no depletion had been sustained. The cost of effecting and closing the sale was $20,000, leaving a capital net gain of $730,000. In addition to this $730,000, Mr. Allen had ordinary net income of $50,000. He files his return for the calendar year 1922. His exemption is $2,400. PROBLEM:

Compute the tax for 1922.

SOLUTION:

The computation of the tax under sections 210 and 211 is as

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Portion of surtax attributable to the sale of the mine is

780,000 730,000,

of $360,960, or $337,821.54. This is $177,821.54 more

than 16% of the selling price of the mine, so that a reduction of that amount is to be made by reason of the limitation set forth in Sec. 211 (b), leaving a surtax of $183,138.46. This amount plus the $62,048 normal tax, results in a total tax of $245,186.46. The computation under Sec. 206 would result as follows:

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This amount, $99,858, being less than the total tax of $245,186.46 arrived at by the computation under Sec. 211 (b) will represent Mr. Allen's tax liability, provided, however, that this is not less than 122% of the total net income. The total net income was $780,000, 1212% of which is $97,500. Mr. Allen's tax liability for 1922 is therefore $99,858.

REFERENCES:

Sec. 206 (b): "In the case of any taxpayer (other than a corporation) who for any year derives a capital net gain, there shall (at the election of the taxpayer) be levied, collected and paid, in

lieu of the taxes imposed by sections 210 and 211 of this title, a tax determined as follows:

"A partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner provided in sections 210 and 211, and the total tax shall be this amount plus 12% per centum of the capital net gain; but if the taxpayer elects to be taxed under this section the total tax shall in no such case be less than 122 per centum of the total net income."

Sec. 211 (b): "In case of a bona fide sale of mines, oil or gas wells, or any interest therein, where the principal value of the property has been demonstrated by prospecting or exploration and discovery work done by the taxpayer, the portion of the tax imposed by this section attributable to such sale shall not exceed, for the calendar year 1921, 20 per centum, and for each calendar year thereafter 16 per centum, of the selling price of such property or interest."

NOTE:

Section 210 imposes the tax at the normal rates, and section 211 imposes the tax at the graduated surtax rates.

FACTS:

PROBLEM 59

Illustrating Basis of Computation of Net Income

(a) John Weber, whose accounts clearly reflect his income, closes his books annually on June 30th.

(b) George Vernon, whose accounts also reflect his income accurately, closes his books annually on December 31st.

(c) Charles Hall has no annual accounting period and does not keep books.

QUESTION:

How should the above individuals compute net income for income-tax purposes for the taxable year 1921 ?

ANSWERS:

(a) John Weber should report income on an annual basis beginning July 1, 1920, and ending June 30, 1921, in accordance with the method of accounting regularly employed by him.

(b) George Vernon should report his income on the calendar

year basis in accordance with the method of accounting regularly employed by him.

(c) Charles Hall must use a method which clearly reflects the true net income and report on the calendar-year basis.

REFERENCES:

Sec. 212 (b): "The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income. If the taxpayer's annual accounting period is other than a fiscal year as defined in section 200 or if the taxpayer has no annual accounting period or does not keep books, the net income shall be computed on the basis of the calendar year."

Art. 22. Regulations 62: "Net income must be computed with respect to a fixed period. Usually that period is twelve months and is known as the taxable year. Items of income and of expenditures which as gross income and deductions are elements in the computation of net income need not be in the form of cash. It is sufficient that such items, if otherwise properly included in the computation, can be valued in terms of money. The time as of which any item of gross income or any deduction is to be accounted for must be determined in the light of the fundamental rule that the computation shall be made in such a manner as clearly reflects the taxpayer's income. If the method of accounting regularly employed by him in keeping his books clearly reflects his income, it is to be followed with respect to the time as of which items of gross income and deductions are to be accounted for. See article 51. If the taxpayer does not regularly employ a method of accounting which clearly reflects his income, the computation shall be made in such manner as in the opinion of the Commissioner clearly reflects it."

Art. 23. Regulations 62: "(1) Approved standard methods of accounting will ordinarily be regarded as clearly reflecting income. A method of accounting will not, however, be regarded as clearly reflecting income unless all items of gross income and all deductions are treated with reasonable consistency. See section 200 of the statute for definitions of "paid," "paid or accrued," and "paid or incurred." All items of gross income shall be included in the gross income for the taxable year in which they are received by the taxpayer, and deductions taken accordingly, unless in order clearly to reflect income such amounts are to be properly accounted for as of a different period. See section 213 (a). For instance, in any case in which it is necessary to use an inventory, no accounting in regard to purchases and sales will correctly reflect income except an accrual

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