ness and property, together with all amounts of income from all other sources. It embraces, of course, not only the income of a manufacturer or dealer from his business, but also income from all other sources such as rentals, royalties, interest, dividends, and profits from the sale of assets."

Income of Contracting Companies. Where a contracting company has contracts which may run for a period of several years, it may prepare its return in such manner that its gross income will be arrived at on the basis of completed work; that is to say, on jobs which have been finally completed and payments made during the year. If the gross income is arrived at by this method, the deductions from gross income should be limited to the expenditures made on account of such completed contracts.8

Income from Export Business. Income from the business of exporting goods is held to be taxable by the Treasury Department. It has also been held that

tax on such income is not a tax on the articles exported, and therefore not unconstitutional in that regard.9

Accounts Receivable. Accounts and bills receivable of a business concern are treated by the Treasury Department as income for the year in which they are created; that is, in the year in which the accounts

7 Reg. 33, Arts. 106 and 107.

8 T. D. 2161.

9 Peck v. Lowe, 234 Fed. 125. It was so held by the District Court in which the case was first decided. At the present time the case is before the Supreme Court on appeal.

are set up on the books or the bills receivable are accepted.10

Goods Sold on Approval. Where goods are sold on approval, the purchaser paying the full price at the time of sale, but having the privilege of returning the goods within a certain period, the amount received upon the sale should be included as income. Subsequently if the goods are returned and the purchase price refunded the refund may be deducted as a loss or the sum may be treated as a "purchase during the year" by the seller. This procedure would seem to be proper in any case where the transaction is in the course of the taxpayer's business or trade. Where, however, an individual sells property in a transaction not connected with his business or trade, with the privilege on the part of the buyer of returning the property within a certain period and receiving back the purchase price, the transaction should not be considered. as closed and completed until the period during which the property may be returned has expired. Otherwise if the taxpayer includes the profit on such transaction in his income for the year he may not be able to avail himself of the loss of that profit if the refund takes place in a subsequent year, since the loss can be offset only against gains in similar transactions during the latter year. The proper method of handling such transactions would seem to be to hold the payment "in suspense" until the title has passed without condition from the seller to the buyer, and to enter the profit on the transaction as income for the year in which that takes place.

10 Letter from Treasury Department dated March 2, 1915; I. T. S. 1917, ¶ 1183.

Payments by Instalment. If payments for goods sold are made in instalments by the buyer, a proportionate part of each instalment represents the profit on the sale of the goods and the rest represents a return of capital to the seller. The manner of treating the income arising on the payment on such instalments is described in a later chapter.11

Income from Business of Certain Public Utilities May Be Exempt. The law expressly exempts from tax any income derived from any public utility or from the exercise of any essential governmental function accruing to any state, territory or the District of Columbia or any political subdivision of a state or territory. It further provides that whenever any 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 in good faith into a contract with any person or corporation, the object and purpose of which is to acquire, construct, operate or maintain a public utility, no tax shall be 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, district or political subdivision, but this does not confer upon any person or corporation any financial gain or exemption or relieve any such person or corporation from the payment of a tax as provided for in the law upon that part or portion of such income to which such person or corporation is entitled under the contract.1 12

11 See Chapter 26.

12 Act of September 8, 1916, § 11 (b).

Income from Partnerships. The net income of a partnership from business, trade and commerce and from all other sources is returned by the partners under the foregoing general rules and the special rules discussed in the chapter on partnerships.13

13 See Chapter 10.

F.I.Tax.-16

CHAPTER 19

INCOME FROM FARMING

Special rules have been made with respect to farms and farmers.1 In connection therewith the term "farm” is defined as embracing the farm in the ordinary accepted sense, plantations, ranges, stock farms, poultry farms, dairy farms, fruit farms, truck farms, and all lands used for similar purposes; and the term "farmers" is defined as all persons who cultivate and operate or manage farms for gain or profit, either as owners or tenants.

"Gentlemen Farmers." A person cultivating or operating a farm for recreation or pleasure, on a basis other than the recognized principles of commercial farming, the result of which is a continual loss from year to year, is not regarded as a farmer. In such cases, if the operation of a farm results in a net gain for the year, such gain must be included. If, however, the expenses and losses incurred in connection with the farm are in excess of the receipts the entire receipts from the sale of products may be omitted from the return of income; and the expenses, being regarded as personal expenses, will not be allowed as a deduction from income derived from other sources.

Farmers Keeping Books. Farmers who keep books, according to some approved method of accounting,

1 T. D. 2153.