tain as nearly as possible the true value of the property at the time it was taken over, and any excess over this ascertained value is income. Similarly, it has been ruled that where corporations have acquired for a mere nominal sum, property which at the time of its acquirement had value greatly in excess of such sum, a careful estimate of the value of the property at the time it was acquired may be fixed and set up as the value representing the cost of the property, and any excess over such fixed value, at which such property may thereafter be disposed of, will be treated as income. The value of property so fixed is subject to the approval of the Internal Revenue Bureau.10

RULE AS TO FARMERS. The cost of stock purchased for resale may be deducted by a farmer under the item. of expense in the year in which the stock is purchased.11 This, however, is not an absolute requirement, since a farmer may purchase stock to such an extent that the cost would more than offset his income for the year. He may therefore treat the amount paid for stock in the same manner as the cost of any other property, that is, make no deduction at the time of purchase, but deduct such cost from the selling price at the time of sale and report only the remainder as profit. Money expended for stock for breeding purposes is regarded as capital invested and such sums may not be deducted as expense in the year in which the stock is purchased. The amount so paid for stock for breeding purposes may be taken into consideration under the head of depreciation, that is, the total sum paid may be divided by the number of years in which

10 T. D. 2161. 11 T. D. 2153.

the stock is expected to live, or be useful for the purposes for which bought, and the resulting sum may be deducted from each year's income. Should such stock be sold at any time, the cost thereof, less the aggregate amount which has been so claimed as depreciation, may be deducted from the selling price, the remainder, if any, constituting income.

PROPERTY LEFT BY A DECEDENT. When an individual dies after March 1, 1913, leaving property, all gains or losses on subsequent sales should be computed on the basis of the appraised value of the property at the date of death of the former owner. Neither the executors nor anyone acquiring the property of the decedent is required to make a return of the book gains or losses up to the date of death. If the executors should sell the property the difference between the appraised value at the date of death and the selling price constitutes the taxable profit. If the property is transferred to a beneficiary of the estate no income accrues to the beneficiary as a result thereof, since the value of property acquired by gift, bequest, devise or descent is exempt from tax. Any income which the beneficiary thereafter derives from such property is taxable and, if such property is sold, the difference between the appraised value of the property at the date of decedent's death and the selling price constitutes the taxable profit.12 In cases where an individual died prior to March 1, 1913, the value on March 1, 1913, of any property left by the decedent is the amount to be used as a basis for computing the taxable profit in any subsequent sale by the executors or the beneficiaries.

12 Telegram from Treasury Department dated February 3, 1917; I. T. S. 1917, ¶ 1999.

Property Acquired Before March 1, 1913. The 1916 Law provides that for the purpose of ascertaining the gain derived or loss sustained from the sale or other disposition of property, real, personal, or mixed, acquired before March 1, 1913, the fair market price or value of such property as of March 1, 1913, shall be the basis for determining the amount of such gain derived or loss sustained.13 This provision applies in all cases of individuals and corporations. In all such cases the original cost of the property is disregarded and the value as of March 1, 1913, is taken, whether or not such value is more or less than the original cost.14 Under the 1909 and 1913 Laws it was the practise of the Department to require the taxable profit to be determined by first ascertaining the difference between the cost and the selling price and then pro-rating the result according to the number of months the property was held before and after the incidence of the tax, but this rule has no application under the present laws.

MARKET VALUE OF SECURITIES ON MARCH 1, 1913. Where stock, acquired prior to March 1, 1913, is sold, and such stock was traded in on an exchange, the fair

13 Act of September 8, 1916, § 2 (c), § 5 (a), § 6 (a), § 10. 14 This provision first appeared in the 1916 Law, no reference being made in the 1909 Law or the 1913 Law as to assets acquired prior to the incidence of the tax. In one case under the 1909 Law it was held that profit on the sale of property purchased prior to January 1, 1909, and sold thereafter was income only to the extent that the selling price exceeded the ascertained market value on January 1, 1909. (Cleveland, etc., Railway Company v. U. S., 242, Fed. 18.) In another case it was held that where the assets were acquired for the purpose of sale, the inventory value at the time of the incidence of the tax should be the basis. (Doyle v. Mitchell, 235 Fed. 686; 149 C. C. A 106.)

market price or value as of March 1 is held to be the average price for the day in cases where there is a variation between the opening and closing price." 15

SPECIAL RULE IN CASE OF BOOK VALUES REPORTED UNDER 1909 LAW. Under the provisions of the 1909 Law the Treasury Department permitted income to be computed on the basis of changes in book values. Hence, where a corporation for the years 1909 to 1912 inclusive, made its returns strictly in accord with the regulations then in force, the increase of book values of property being returned as income and corresponding decreases being deducted, as the regulations then required and permitted, the profit on such property could be computed under the 1913 Law by deducting the amount of the last adjusted value subsequent to January 1, 1909, without pro-rating as required in other cases.16 This ruling has no application under the 1916 Law, which expressly requires, in all cases, that the gain be based on the value as of March 1, 1913, regardless of any book values prior thereto.

Selling Price. The selling price is the amount received for the property. It may be held to be taxable whether received in cash or in the equivalent of cash. For a discussion of income received in the equivalent of cash, see chapter on income in general.17

15 Letter from Treasury Department, dated November 21, 1916; I. T. S. 1917, ¶ 273.

16 T. D. 2130.

17 See Chapter 16.

CHAPTER 21

INCOME FROM RENT

Rent is returnable as income in the year in which it is received, and not necessarily in the year in which it becomes due. Thus, where a tenant pays part of his rent for the preceding year on the second day of January of the following year, the amount so paid is income to the landlord for the year in which it is received, and not the year which it covers.1 This rule, however, is not absolute, as the landlord may, if he keeps his books accordingly, report the rent for the year in which the income accrues and charge against it the deductions for the same period.

Value of Improvements Made by Tenant. Where, under the terms of a rental or lease contract, a tenant agrees to erect a building or to expend during the rental period a certain fixed sum in making improvements upon the freehold of the lessor, it is held for income tax purposes that the building or permanent improvement becomes a part of the realty unless otherwise agreed between the contracting parties; and, as such, must be accounted for as gain or profit to the lessor at the time the lease is terminated, whether terminated by expiration or otherwise. The amount

1 Letter from Treasury Department dated February 9, 1915; I. T. S. 1917, ¶ 226.