debentures of other joint stock land banks or any federal land bank belonging to such joint stock land bank. They are taxable, however, as to income from other sources and consequently it would seem are not exempt from the requirement of making a return of annual net income since the exemption from making returns applies only to corporations not subject to the tax.24

Income Accruing to State or Local Governments. In addition to the fourteen exemptions noted above Section 11 of the 1916 Law provides that income shall not be taxed if it is derived from any public utility or from the exercise of any essential governmental function and accrues to any state, territory or the District of Columbia or any political subdivision of a state or territory. It also provides that no income accruing to the government of the Philippine Islands or Porto Rico or the government of any political subdivision of those possessions shall be taxed. Where a state, territory or the District of Columbia, or any political subdivision of a state or territory, has prior to the passage of the law entered into a contract with any person or corporation to acquire, construct, operate or maintain a public utility no tax is levied upon the income derived from the operation of such public utility so far as the payment thereof will impose a loss or burden upon such state, territory or district or political subdivision. This provision entitles the owner of such public utility, whether a person or a corporation, to deduct the amount of income paid to the state or local government as its share, and the rulings thereon are contained in the chapters on Deductions.2

24 Act of September 8, 1916, § 13, ¶ (b). 25 See Chapter 28.

25

Federal Reserve Banks. The income of Federal Reserve Banks is exempt from income tax by express provision in the Federal Reserve Act.26 The dividends on the stock of such banks are exempt from tax in the hands of member banks.27

26 Federal Reserve Act, 38 Stat. 251, Ch. 6, § 7.

27 Federal Reserve Bulletin, April 1, 1916

CHAPTER 16

INCOME IN GENERAL

A discussion of the various conceptions of income would be interesting but is out of place in a work of this character. For all practical purposes it is sufficient to state that the income which is taxable under the present laws is defined in the statute. One conception of income excludes gains or increment in the value of capital assets, but this conception was not that of Congress, since the tax is not only upon income conceived as a production of capital, but also upon gains and profits derived from sales or dealings in property, growing out of the ownership or use of or interest in property or from gains or profits from any source whatever. For the purpose of discussion in this and the following chapters, the general rules and principles applicable to income from all sources will first be described, and thereafter, the special rules applicable to income from personal services, income from farming, income from business, trade and commerce, income from dividends, income from interest and rent, and income from miscellaneous sources. special rules relating to income from partnerships and income from fiduciaries are treated in the chapters on those respective subjects.

The

What Constitutes Income. The word "income" as used in revenue legislation has a settled legal meaning. The courts have uniformly construed it to include only

the receipt of actual cash as opposed to contemplated revenue due but unpaid, unless a contrary purpose is manifest from the language of the statute. What was taxed by the 1909 Law was "net income received," not income, accruing or accrued, which had not been received and portions of which might never be received. While the phrases "income received" and "income accrued" are frequently used in the same statute, the courts have not departed, unless it expressly appears otherwise, from a construction of the law in accord with an intention to reach the actual and not the potential income. In the 1913 Law the two preceding phrases were employed. Doubtless it was the intention of Congress to employ terms of sufficient comprehension to reach the actual income by foreclosing any possible avenue of escape, but it can hardly be said that in so doing an intention prevailed to tax that which did not actually exist, except on paper, as income accrued during the taxing period. One cannot be said to receive an income of defined proportions until he balances receipts and deductions at the end of a stated period and ascertains, not what is due, but what has been actually received. The assets and liabilities may be measured by a different rule of accounting, but income as defined by the courts means, as said in United States v. Schillinger,1 "in the absence of any special law to the contrary, income must be taken to mean money, and not the expectation of receiving it or the right to receive it at a future time." In the 1916 Law the phrase "income received" is used with respect to both individuals and corporations.3

114 Blatch. 71.

2 Maryland Casualty Co. v. U. S., Ct. Cls., T. D. 2451.

3 The language of the 1909 Law was also held to indicate that

Actual Receipts. The 1916 Law intends primarily to tax individuals and corporations upon the income received, and not that which has arisen or accrued, but has not been received. This basis of actual receipts is not exclusively prescribed, since both individuals and corporations may, if they so choose and the Commissioner of Internal Revenue permits them, report their net income on the basis of accruals instead of actual receipts. This provision is more fully discussed in subsequent paragraphs of this chapter. If the taxpayer does not elect to report on such basis, or is not permitted to do so by the Treasury Department, the tax must be computed on the basis of actual receipts. An early ruling of the Treasury Department, under the 1913 Law, holding that a person receiving fees or emoluments for professional services must include all actual receipts for services rendered in the year for which the return was made, together with all unpaid accounts, charges for services or contingent income due for that year, was discussed in the case of Edwards v. Keith,5 and the court said: "No such construction of the Treasury Department can enlarge the scope of the statute so as to impose the tax upon unpaid charges for professional services rendered, which for aught anyone can tell may never be paid. The statute alone determines what is income to be taxed. It taxes only income derived from many specified sources, and one does not derive income by rendering services and charging for them." Accrued the net income, which was the measure of taxation, meant what had actually been received and not that which, although due, had not been received, its payment for any reason having been deferred or postponed. (Mutual Benefit Life Insurance Company v. Herold, 198 Fed. 199.)

4 Act of September 8, 1916, § 1 and § 10.

5 231 Fed. 110.