SAME BASIS MUST BE USED CONSISTENTLY. Where a taxpayer adopts a system of reporting according to his books, he must report consistently on this basis. He may not claim a right to report on the cash basis in part and the accrual basis in part. The two systems cannot overlap.44

ACCRUED CHARGES. Under this provision, it is permissible for a corporation which accrues on its books, monthly or at other stated periods, amounts sufficient to meet fixed annual or other charges, to deduct the amount so accrued, provided the accruals approximate as nearly as possible the actual liabilities for which the accruals are made, and income from fixed and determinable sources accruing to the corporation is returned on the same basis.45

44 Maryland Casualty Company v. U. S. (Ct. Cls.) T. D. 2451. 45 T. D. 2433.

CHAPTER 17

INCOME FROM PERSONAL SERVICES

The law expressly provides that the net income of a taxable person shall include gains, profits, and income derived from salaries, wages, or compensation for personal services of whatever kind and in whatever form paid, or from professions or vocations. It is to be noted that salaries, wages, or compensation for personal services are taxable income "in whatever form paid." This is one of the two cases in which the law expressly specifies that the tax shall be based upon payments other than in cash, the other being the provision relating to stock dividends. Payment of salaries, wages, etc. in the form of living quarters, board or lodging, is referred to in the preceding chapter under the head of income received in the equivalent of cash.

Salaries. Salaries should be reported in the year in which they are received and not in the year in which earned, unless also received in that year. Where a part of the compensation of an employee is in the form of a salary payable monthly, and a part in the form of a bonus not fixed and determined until on or after January 1, of the year following that in which the services were rendered, the fixed salary should be reported in the year in which it is received and the bonus should not be reported until return is made for the year in which that is received. Thus, one receiving a bonus in January, 1918,

for services rendered in 1917, should not report the amount of bonus as income until he files his return on or before March 1, 1919. A salary paid by a corporation which is itself exempt from the income tax is nevertheless subject to tax in the hands of the employee.1 In the case of corporations, so-called "salaries" of stockholders, if based on the amount of stock held, are considered to be distribution of the net profits of the corporation, not deductible as a business expense of the corporation, and, therefore, not subject to the normal tax in the hands of the recipient.2

Bonuses and Profit Sharing. Where employees receive bonuses, or are entitled to a share of the profits of the employer the amount so received should be included as income, provided the same is paid under a contract, express or implied, or a long time practice, regularly employed, which constitutes a condition, if not a contract, under which the employees may reasonably expect additional pay for the greater or better services which they render. Such payments are income to the employee if they are of such character that the employer is entitled to deduct the same as an expense of doing business. If the bonus is a mere gift, the employer having the right to pay or not pay as it suits his pleasure, the employee should not treat the amount as income, since gifts or gratuities are not taxable, and the employer is not entitled to deduct the amount from his income as an expense of doing business. The rules governing the deduction of bonuses and profit sharing payments are more fully treated under the heading of

1 T. D. 2135, T. D. 2090.

2 This point is more fully discussed under the head of deductions in Chapter 28.

deductions, which should be read in this connection.3 The rule to be followed by the employee is that if the employer is entitled to deduct the amount as an expense of doing business, the employee should return the amount as income, and, vice versa, if the employer is not entitled to deduct the amount as expense, the employee should not return the amount as income, otherwise the same sum of income would be taxed twice. If so-called bonuses or profit sharing are paid to stockholders of corporations, which are in fact distributions of net profits based on stock holding, they will be considered as dividends and held to be taxable as such.

Salaries of Partners. As a general rule members of a general partnership are not entitled to salaries, and the Treasury Department will not recognize the payment of salary to a partner unless such salary is provided for in the articles of partnership or by express contract. The question is not of very great importance under the income tax law as partnerships are not taxed as entities, but assumes importance under the excess profits tax law.

Voluntary Offerings Received by Clergymen. Although as a general rule gifts and gratuities are not income, yet Easter offerings, and fees received by clergymen for funerals, masses, marriages, baptisms, etc. are considered income, because though in the form of gifts they are in fact payment to the clergymen for services. rendered. Christmas gifts to clergymen do not come within this category. The rule to be observed is whether or not the money is actually a gift or merely in the form of a gift.

3 See Chapter 28. 4 T. D. 2090.

Commissions. Commissions paid to salesmen are income, which should be accounted for in the return of the person receiving the same in the year in which received.5

Compensation for Services Extending Over a Year. When money in payment of services extending over a year is received at the close of the period all of it becomes income for the year in which it is received. Thus, if no determination has been made of the amount due the trustee of an estate, as compensation for his services over a period of years, until the trust is terminated, the amount allowed him should be returned in full as income for that year, and it should not be pro-rated over the length of time the services were rendered.

Compensation to Federal Government Officers and Employees. Compensation received by Federal officers and employees is subject to tax whether paid in cash or in other forms. The entire sum received, however, is not necessarily taxable as will be indicated in the following paragraphs. 6a

LIVING QUARTERS. Commutation of quarters and the money equivalent to quarters furnished in kind should be returned as income. When quarters are furnished in kind of a less number of rooms than the number allowed by law, the money equivalent only of the number of rooms actually assigned should be returned as income. When quarters are furnished of a greater number of rooms than the number allowed by law, it is to be assumed that the excess number is assigned for the conven

5 T. D. 2090.

6 T. D. 2135.

6a See T. D. 2079.