method. A taxpayer is deemed to have received items of gross income which have been credited to or set apart for him without restriction. See article 53. On the other hand, appreciation in value of property is not even an accrual of income to a taxpayer prior to the realization of such appreciation through sale or conversion of the property. . . . PROBLEM 60 Illustrating Basis for Filing Returns in Case Accounting Period is Changed FACTS: (a) Sam Bolden changed the date for the annual closing of his accounts from June 30 to December 31. His last return was filed for the fiscal year ended June 30, 1921. (b) Edward White changed his yearly closing date from December 31 to September 30. His last return was filed for the calendar year 1921. (c) Sam Hold changed his yearly closing date from June 30 to September 30. His last return was filed for the fiscal year ended June 30, 1921. In each case the change in accounting periods was made with the approval of the Commissioner. QUESTION: What returns are required to be filed by each of the individuals above mentioned? ANSWER: (a) Sam Bolden should file a return for the period from July 1, 1921, to December 31, 1921, inclusive. Thereafter, unless he receives permission from the Commissioner to change, he is required to file returns on the calendar-year basis. (b) Edward White should file a return for the period from January 1, 1922, to September 30, 1922, inclusive. Thereafter, unless he receives permission from the Commissioner to change, he is required to file returns on the basis of the fiscal year ended September 30. (c) Sam Hold should file a return for the period from July 1, 1921, to September 30, 1921, inclusive. Thereafter, unless he receives permission from the Commissioner to change, he is required to file returns on the basis of the fiscal year ended September 30. REFERENCES: Sec. 212 (c): "If a taxpayer changes his accounting period from fiscal year to calendar year, from calendar year to fiscal year, or from one fiscal year to another, the net income shall, with the approval of the Commissioner, be computed on the basis of such new accounting period, subject to the provisions of section 226." Sec. 226 (a): "That if a taxpayer, with the approval of the Commissioner, changes the basis of computing net income from fiscal year to calendar year a separate return shall be made for the period between the close of the last fiscal year for which return was made and the following December 31. If the change is from calendar year to fiscal year, a separate return shall be made for the period between the close of the last calendar year for which return was made and the date designated as the close of the fiscal year. If the change is from one fiscal year to another fiscal year a separate return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year." (b): "In all cases where a separate return is made for a part of a taxable year the net income shall be computed on the basis of such period for which separate return is made, and the tax shall be paid thereon at the rate for the calendar year in which such period is included." PROBLEM 61 Illustrating Gross Income-Profits from Business, Compensation for Service, Interest, and Dividends Received FACTS: The Profit and Loss Statement of Walter Elsrode for the taxable year ended December 31, 1921 showed the following: (a) Trading account Gross sales Less: Returned sales $84,000 $82,000 (b) Director's fees (c) Interest on certificate of deposit (d) Interest on bonds of domestic corporations poration (paid from earnings accrued. 600 3,500 750 750 QUESTION: Which of the above items are taxable and which, if any, are non-taxable? ANSWER: (a) Trading account, $47,000. Taxable. (b) Director's fees, $600. Taxable. (c) Interest received on certificates of deposit, $3,500. Taxable. (d) Interest received on domestic corporation bonds, $750. Taxable. (e) Cash dividend, domestic corporation stock, $750. Taxable at surtax rates, but not subject to normal taxes. REFERENCE: Sec. 213: "... the term 'gross income'— "(a) Includes gains, profits, and income derived from salaries, wages, or compensation for personal service (including in the case of the President of the United States, the judges of the Supreme and inferior courts of the United States, and all other officers and employees, whether elected or appointed, of the United States, Alaska, Hawaii, or any political subdivision thereof, or the District of Columbia, the compensation received as such), of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. NOTE: While the above problem as prepared relates to individuals, such items as are applicable to corporations would be similarly treated if received by corporations. PROBLEM 62 Illustrating Gross Income-Profit on Sale of Residence Whole of Which has been Continuously Occupied by FACTS: Owner Robert P. Ramsey in 1921, sold his residence for $13,000. He had purchased the property in 1916 for $10,000. Depreciation for the 5 years was estimated to be $1,000, which depreciation, however, was not deductible on Mr. Ramsey's income-tax returns. QUESTION: What is the amount of profit to be reported by Mr. Ramsey? ANSWER: The depreciation, since it could not be deducted as it accrued, need not be taken into consideration in computing the profit from the sale, and the amount to be reported is $13,000 less $10,000, or $3,000. REFERENCES: Sec. 213 (a) (Quoted under Problem 61.) Bul. 30-20-1085; O. D. 600: "Inasmuch as no deduction for depreciation of the personal residence of a taxpayer is allowable in his income tax returns, a taxpayer in determining the gain or loss arising from the sale of his personal residence, continuously occupied by him as such, is not required to reduce the cost of the property or its fair market value as at March 1, 1913, by the depreciation sustained." See Problem 63. PROBLEM 63 Illustrating Gross Income-Profit on Sale of Residence a Part of Which has been Returning Rent. FACTS: George H. Hutchins in 1921, sold his residence for $20,000. He had purchased the property in 1916, for $10,000, and had occupied it continuously. Two rooms had, however, been rented out and the income therefrom reported on Mr. Hutchins' tax returns. As an offset against this income Mr. Hutchins had deducted a total of $200 depreciation on his returns. QUESTION: What, if any, is the amount of profit to be returned by Mr. Hutchins on the sale of his residence? ANSWER: $10,200. The cost less the depreciation deducted is $9,800. This amount deducted from the selling price results in a taxable profit of $10,200. REFERENCES: Sec. 213 (a): (Quoted under Problem 61.) PROBLEM 64 Illustrating Gross Income-Pension Received by a Retired Employee of a State FACTS: C. M. Wagner is a retired employee of the State of X, and receives an annual pension of Y dollars from the State. |