(which is taxable) as the following rules will indicate. Difficulty sometimes arises in segregating capital and income in the case of instalment payments for goods sold in the course of business. The rulings which have been issued by the Treasury Department indicate, however, a method which might be adopted in handling such payments, as more fully appears in a later part of this chapter. Dividends on Life Insurance Policies. Dividends paid on life insurance policies that have not matured, whether or not such dividends are drawn in cash by the insured or applied to the reduction of the annual premium due, are not considered items of taxable income. Dividends from paid-up policies, however, are considered income. The former represent merely a return of a part of the premium theretofore paid by the insured, while the latter represent a distribution of income. earned by the insurance companies on the premiums paid by the insured, and, when paid to the insured, should be treated the same as dividends from corporations.4 Surrender Value of Insurance Policies. When an insured person discontinues insurance prior to the maturity of his policy, he is entitled to a certain surrender value, which is paid to him by the insurance company. The amount so received represents the return to the insured of a part of the premiums he has paid in the past, and is therefore not income. If the amount should exceed the aggregate of premiums paid, the excess would be taxable income.5 4 T. D. 2137. 5 T. D. 2090, as amended by T. D. 2152. Letter from Treasury Department dated February 8, 1917; I. T. S. 1917, ¶ 2002. Endowment Policies. Where an endowment policy is paid to the insured, it is exempt from tax to the extent that the payment represents a return to the insured of amounts paid by him from time to time as premiums, but is taxable on the excess. Thus, if over a period of years the insured has paid $700 in premiums. and, at the expiration of the term receives $1,000 from the insurance company, $300 of that sum is taxable income, but the $700, representing return of premiums, is not income. Annuities. So much of annuities paid to an annuitant as represents payment made by him on the annuity contract, is not taxable income. Any increment on the purchase price of the annuity is taxable income." The Treasury Department has not prescribed any rules for determining what part of each payment of an annuity is income and what part represents return of principal. In the case where one has purchased a life annuity it seems the annuitant should be permitted to deduct annually a part of the purchase price determined perhaps by dividing the total purchase price of the annuity by the number of years of his expectation of life, as shown by the insurance mortality tables, at the time of purchase. Thus if the expectation of life is fifteen years, the purchase price should be divided by fifteen and only so much of the annuity as exceeds this sum each year can reasonably be said to be income to such annuitant. Matured Shares in Building and Loan Association. Where the amount paid back to a depositor by a building 6 T. D. 2090, as amended by T. D. 2152. 7 Letter from Treasury Department dated January 12, 1914; I. T. S. 1917, ¶ 306. F. I. Tax.-19 or loan association, at the maturity of the series, exceeds the aggregate deposits made to that series, only the difference between the total amount received for the surrender of the matured certificate and the aggregate of the deposits made by the certificate holder, is to be returned as income.8 Compensation by Insurance. Insurance money is clearly a substitute for the assets lost or destroyed. The money so received from the insurance company is not income, but a direct compensation for the property lost, and it is expressly provided by the law that no loss can be claimed for property destroyed when such loss is compensated for by insurance.9 Timberlands. The value of timberlands at the incidence of the tax may be deducted pro-rata as the lumber is cut and sold in that such value represents the capital of the owner.10 The Treasury Department has published several rulings describing the procedure to be followed in claiming annual allowances for the return of capital in the case of owners of timber properties, which are summarized in the following paragraphs. BASIS OF ALLOWANCE. Owners of timberland logging off the timber and manufacturing it into lumber will be permitted to exclude from gross income, either through a deduction from gross receipts or through a charge into the cost of manufacturing the timber into lumber, an amount equivalent to the fair market price or value of 8 Letter from Treasury Department dated February 8, 1917; I. T. S. 1917, ¶ 2000. 9 Act of September 8, 1916, §§ 5 and 12. 10 Doyle v. Mitchell, 235 Fed. 686. the standing timber as of March 1, 1913, if the property was acquired prior to that date or the actual cost, that is, the gross purchase price of the timber property, if purchased subsequent to that date.11 FAIR MARKET VALUE AS OF MARCH 1, 1913. The fair market value of timber or timberlands as of March 1, 1913, is the price at which the property, in its then condition and with the circumstances then surrounding it, could have been sold for cash or its equivalent. The value must not be speculative, but must be determined without taking into account any prospective profit that may result from the manufacture of the timber into lumber. It must be as the law contemplates, a fair market value, and, once determined, must be set up on the books. As the measure of a stumpage deduction for income tax purposes, it must remain constant and cannot be increased. The department does not specifiy any particular method of arriving at the fair market price or value as of March 1, 1913, but requires the owner to determine the amount which, in his opinion, is the fair market price or value as of that date, and to calculate his deduction on that basis. The amount so determined by the owner will be given due consideration, and, if at a later date it appears to the Treasury Department that it does not represent the fair market price or value, the owner will be advised and be given an opportunity to present reasons and facts as to why the figures should be accepted. GROSS PURCHASE PRICE. If the property is purchased subsequent to March 1, 1913, the Treasury Department 11 Letter from Treasury Department dated March 3, 1917; I. T. S. 1917, ¶¶ 2164 and 2165. will allow, as the basis of the annual deduction, an amount representing the original cost of such timber plus any carrying charges that may have been capitalized or not deducted from income, the purpose being to secure to the owner, when the timber has been exhausted, an aggregate amount which, plus the salvage value of the land, will equal the capital actually invested.12 After PROCEDURE IN CLAIMING ANNUAL ALLOWANCE. determining the value of the property as of March 1, 1913, or its cost, if purchased subsequent to that date, the number of feet (board measure) in the entire timber holdings should be estimated. By dividing the original cost or value by this number, the per unit value or price will be ascertained. This per unit value multiplied by the number of feet of timber removed each year will measure the annual deduction, which may be made until the aggregate amount equals the amount of capital invested. When the capital has been so extinguished, the entire amount thereafter realized from the logged off lands, or from other salvage, will be returned as income of the year in which the timber or the lands are sold or disposed of. If the timber or timberlands are sold en bloc the gain or loss will be ascertained on the basis of the difference between the fair market price or cost (less any amounts which have been deducted as return of capital) and the selling price, according as the property was acquired before or after March 1, 1913.13 Instalment Payments. Where real estate is sold on a monthly instalment basis under a contract which vests 12 Reg. 33, Arts. 139 and 140. 13 Letter from Treasury Department dated March 3, 1917; I, T. S. 1917, ¶¶ 2164 and 2165. |