be gauged by comparisons. The Supreme Court said, in United States v. Phisterer, 94 U. S. 224:

"Quarters are expected to be furnished by the government to its officers; when it cannot thus furnish, it allows them to be obtained otherwise and pays a money compensation therefor called commutation. This upon the assumption, first, that the officers are actually engaged in the public service; and, second, that such quarters are necessary to the discharge of their duty."

Lastly, may such allowances be considered as income? In Eisner v. Macomber, 252 U. S. 189, we find this expression:

"Income may be defined as the gain derived from capital, from labor, or from both combined."

The defendant criticizes the citation of the above case on the grounds of utter dissimilarity as to issue. There can be no doubt that as to issues involved the citation is inapposite. Nevertheless, the generalization of the definition is possible. In this case involving personal service it is comprehensive. The essential factor in the determination of the question lies not alone in the single element of gain, but gain derived from labor. In other words, as remuneration for the officer's services is he not only paid a salary but in addition furnished a house to live in as part thereof? If so, income accrues; if not, no income accrues. The most conspicuous illustration of the differentiation is the Chief Executive of the nation. Our President occupies the White House. If in computing income tax the fair rental value of this most historic and pretentious house and grounds is to be the standard, the annual compensation of the President would indeed be substantially reduced. In the scheme of government, just as in the Army, the White House becomes the executive office of the nation. It is an inseparable incident of the office itself, the one provision made by Congress wherein the executive's duties are to be discharged. An English case decided by the House of Lords in 1892 (Tennant v. Smith, H. L. 1892 Appeal Cases, 150), points out with distinct clearness the vital difference between income and that

which is not income, though apparently an advantage. Lord Watson said:

"It appears to me that the case was decided in the court below, as it has been argued at your Lordships' bar, upon the true legal issue-namely, whether the appellant's residence is income within the meaning of the statutes which must be valued and assessed for income taxes. . . . . The appellant does no doubt reside in the building, but he does so as the servant of the bank and for the purpose of performing the duty which he owes his employers. His position does not differ in any respect from that of a caretaker or other servant, the nature of whose employment requires that he shall live in his master's dwelling house or business premises instead of occupying a separate residence of his own. . . . In the present case the learned judges of the majority have assessed the value of the appellant's residence at £50 upon the somewhat speculative footing that if his duty did not require him to reside in the bank he would be compelled to pay that sum for suitable accommodation for himself and family elsewhere. In that view the so-called benefit may in some instances prove a heavy burden as in the case of a bank agent who, but for the service required by his employers, could continue to reside, free of charge, in his parents' house."

Again, Judge CLAYTON, in Smith v. Jackson, 241 Fed. 747, said:

"I think it may be said, therefore, that an emolument is something positively and directly conferred, as compensation or gain, that the holder of an office receives, and not something necessarily, inseparably and incidentally used by him in the discharge of his duty, a duty for which he is paid a fixed salary."

The

We have heretofore cited a number of state cases. line of demarcation runs parallel with the services one engages to perform. If the nature of the services require the furnishing of a house for their proper performance, and without it the service may not properly be rendered, the house so furnished is part of the maintenance of the general enterprise,

an overhead expense, so to speak, and forms no part of the individual income of the laborer. The master of a vessel and captain of a steamboat are furnished living quarters while on a voyage. A countless number of employees engaged in a great variety of special and important employments are required to be continuously present on the job. They must not only have a place in which to live but adequate facilities for doing what they are called upon to do. Is the maintenance of this overhead expense to be first charged to the government and then in part recouped from the officer's salary by way of taxation?

There are additional instances in the regulations where the allowance is lost, and lost because not indispensable for the performance of the service required. While the mere character of the contingency may not irrevocably determine the nature of the allowance, it is a prime factor available as such. in reaching a conclusion as to whether it is a gain derived from service. The officer may not rent the premises assigned and live away from them. He has no control thereover, except the naked right of an uncertain period of occupancy. The advantage which accrues, the gain which obtains, if any such obtains, is to be ascertained by comparison only, and the comparison resorted to is one involving the mode of living in civil life with that which obtains in the Army. Aside from the pronounced dissimilarity of the two, the argument predicated thereon affords no solution of the problem, for the conclusion drawn results only in a saving, which of itself is not income. It is said that if the officer was not permitted to occupy public. quarters he would be compelled to hire them and pay the expense from his salary. The Department of Justice in Washington occupies and conducts the major portion of its affairs from a commodious and modern office building, rented from the owner and the rent paid by the government. If the learned assistant attorney should resign his public office and resume private practice, he would manifestly be required to rent an office and pay from his own income the expense thereof. Does this fact indubitably characterize the privilege of occupancy of an office in the department, rent free, as income? We think not, for both he and an officer of the Army must remain in the quarters assigned them as an inseparable part of their prescribed duties, just as much so as is the conducting of a

trial or the giving of military instructions or the training of troops. The public quarters of the officer is his office as well as his temporary home. It is not, as well said in the case of Tennant v. Smith, supra, what is paid out but what comes in that constitutes income. It is indeed far from impressive that where an employer, in the course of the promotion and efficiency of the enterprise in which he is engaged, must of necessity provide the indispensable facilities for the successful prosecution of the same, because perchance an employee in the not to be avoided course of his duties may be in a position to avoid an expense which in a different character of service he might be obliged to incur, that therefore the use of the facility constitutes income. In any event, the contention is without merit. Situations must be faced as they exist; rights are not to be determined upon a hypothetical basis in the face of facts. The Army officer may not provide himself with his own quarters. No such regulation or law has ever prevailed. Congress has never accorded the privilege, and the provision for commutation emphasizes the fact. On the contrary, the government furnishes the quarters as a part of the military establishment itself.

From what has been said we believe the plaintiff is entitled to judgment for the amount claimed. It is so ordered.

GRAHAM, HAY, and DOWNEY, Judges, and CAMPBELL, Chief Justice, concur.

III. FORGIVENESS OF INDEBTEDNESS

Regulations 65.

ART. 49. Forgiveness of indebtedness.-The cancellation and forgiveness of indebtedness may amount to a payment of income, to a gift, or to a capital transaction, dependent upon the circumstances. If, for example, an individual performs services for a creditor, who in consideration thereof cancels the debt, income to that amount is realized by the debtor as compensation for his services. If, however, a creditor merely desires to benefit a debtor and without any consideration therefor cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the

latter's gross income. If a shareholder in a corporation which is indebted to him gratuitously forgives the debt, the transaction amounts to a contribution to the capital of the corporation.

U. S. v .OREGON-WASHINGTON R. & NAV. CO. (Circuit Court of Appeals of the United States, 1918. 251 Fed. 211, 1 Am. Fed. Tax R. 989.)

(Printed supra, p. 101.)

KERBAUGH-EMPIRE CO. v. BOWERS

(District Court of the United States, 1924. 300 Fed. 938, 4 Am. Fed. Tax R. 4471.) GODDARD, District Judge. This action is brought by the plaintiff to recover the sum of $5,198.77 paid by plaintiff under protest on June 13, 1922, as the first and second quarterly installments of corporation income tax for the calendar year 1921. The defendant has filed a motion to dismiss the amended complaint, on the ground that it does not state facts sufficient to constitute a cause of action. The cause comes on for hearing on this motion. The essential allegations of the amended complaint that are pertinent to the question involved in this motion are as follows:

That.defendant, at all the times material, was the collector of internal revenue for the Second District of New York; that plaintiff, a New York corporation, was the owner of all the stock of certain subsidiary corporations, including H. S. Kerbaugh, Inc., a Pennsylvania corporation, which on and prior to June 8, 1911, was engaged in the performance of large construction contracts in connection with the building of the Kensico dam in New York; that on that date its subsidiary was in need of funds to finance its construction contracts, and in order to secure funds, which it could advance to the subsidiary for that purpose, applied to the Deutsche Bank of Berlin, through its New York agent, one Edward D. Adams, to make the necessary advances. The bank agreed to extend the required credit, but only on condition that the notes therefor be made payable as to both principal and interest in German marks or their equivalent in United States gold coin at prime bankers' rate in the city of New York for cable transfers to Berlin. Commencing on June 8, 1911, the loans were made in accordance with the following procedure: