such stock or securities), then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made;

(9) If the property consists of stock or securities distributed after December 31, 1923, to a taxpayer in connection with a transaction described in subdivision (c) of section 203, the basis in the case of the stock in respect of which the distribution was made shall be apportioned, under rules and regulations prescribed by the Commissioner with the approval of the Secretary, between such stock and the stock or securities distributed;

(10) If the property was acquired as the result of a compulsory or involuntary conversion described in paragraph (5) of subdivision (b) of section 203, the basis shall be the same as in the case of the property so converted, decreased in the amount of any money received by the taxpayer which was not expended in accordance with the provisions of law (applicable to the year in which such conversion was made) determining the taxable status of the gain or loss upon such conversion, and increased in the amount of gain or decreased in the amount of loss to the taxpayer recognized upon such conversion under the law applicable to the year in which such conversion was made;

(11) If substantially identical property was acquired after December 31, 1920, in place of stock or securities which were sold or disposed of and in respect of which loss was not allowed as a deduction under paragraph (5) of subdivision (a) of section 214 or paragraph (4) of subdivision (a) of section 234 of this Act or the Revenue Act of 1921, the basis in the case of the property so acquired shall be the basis in the case of the stock or securities so sold or disposed of, except that if the repurchase price was in excess of the sale price such basis shall be increased in the amount of the difference, or if the repurchase price was less than the sale price such basis shall be decreased in the amount of the difference.

(b) The basis for determining the gain or loss from the sale or other disposition of property acquired before March 1, 1913, shall be (A) the cost of such property (or, in the case of such property as is described in paragraph (1), (4), or (5), of subdivision (a), the basis as therein. provided), or (B) the fair market value of such property as of March 1, 1913, whichever is greater. In determining the fair market value of stock in a corporation as of March 1, 1913, due regard shall be given to the fair market value of the assets of the corporation as of that date.

(c) The basis upon which depletion, exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the same as is provided in subdivision (a) or (b) for the purpose of determining the gain or loss upon the sale or other disposition of such property, except

that in the case of mines, oil and gas wells, discovered by the taxpayer after February 28, 1913, and not acquired as the result of purchase of a proven tract or lease, where the fair market value of the property is materially disproportionate to the cost, the basis for depletion shall be the fair market value of the property at the date of discovery or within thirty days thereafter; but such depletion allowance based on discovery value. shall not exceed 50 per cent of the net income (computed without allowance for depletion) from the property upon which the discovery was made, except that in no case shall the depletion allowance be less than it would be if computed without reference to discovery value.

Regulations 65.

ART. 1561. Determination of the amount of gain or loss.Section 202 of the statute sets forth the rules for the determination of the amount of gain or loss from the sale or other disposition of property. In general, the gain from the sale or other disposition of property is the excess of the amount realized therefrom over the cost or other basis provided in section 204, and the loss is the excess of such cost or other basis over the amount realized. Whether gain or loss from a sale or exchange shall be recognized, and if so, the extent to which it is to be recognized for the purposes of this title must be determined under the provisions of section 203. (See articles 1571-1580.)

The amount realized from the sale or other disposition of property is the sum of any money received plus the fair market value of the property (other than money) received. In computing the amount of gain or loss, however, the cost or other basis of the property must be increased by the cost of capital improvements and betterments made to the property since the basic date, and by carrying charges, such as taxes on unproductive property, and decreased by the depreciation and similar deductions previously allowed with respect to the property.

for

Examples. (1) A purchased property in 1921 $10,000. He subsequently expended $5,000 for improvements, which was not deducted as a business expense. If A sells the property in 1924 for $20,000, the amount of his gain will be $5,000.

(2) A purchased property for $10,000 in 1921. In 1922 and 1923 he deducted depreciation on the property amounting

to a total of $1,000. If A sells the property in 1924 for $8,000, the amount of his loss will be $1,000.

ART. 1562. Installment contracts.-In the case of property sold under contract providing for payment in installments, article 1561 shall not be construed as preventing the taxation of that portion of any installment payment representing gain or profit, in the year in which such payment is received.

ART. 1591. Basis for determining gain or loss from sale.— The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, is, in general, the cost of such property. This general rule is, however, subject to the exceptions set forth in articles 1592 to 1602 below. The basis for determining the gain or loss from the sale or other disposition of property acquired before March 1, 1913, is (1) the cost of such property (or, in the case of such property as is described in articles 1592 and 1594 below, the basis therein provided), or (2) the fair market value of such property as of March 1, 1913, whichever is greater. What the fair market value of property was on March 1, 1913, is a question of fact to be established by competent evidence. In determining the fair market value of stock in a corporation due regard shall be given to the fair market value of the corporate assets on the basic date. In the case of property traded in on public exchanges, actual sales at or about the basic date afford evidence of value, but in each case the nature and extent of the sale and the circumstances under which it was made must be considered. Thus, prices received at forced sales or prices received for small lots of property may be no real indication of the value of the property in question.

If the taxpayer cannot determine the cost of securities purchased prior to March 1, 1913, because of the loss or destruction of, or failure to keep records, the value of the securities at the date of acquisition may be used in determining the cost. When the approximate date of acquisition is unknown, no general rule can be stated for determining the cost of the securities.

ART. 1592. Property included in inventory.—If the property should have been included in the last inventory the basis for determining the gain or loss from its sale or other disposi

tion is the last inventory value. See articles 1611-1618 with reference to the requirement of inventories.

ART. 1593. Property acquired by gift after December 31, 1920. If the property was acquired by gift after December 31, 1920, the basis is the same as it would be in the hands of the donor, or the last preceding owner by whom it was not acquired by gift. See article 1591. If the donee is unable to ascertain the facts necessary to determine the basis, he shall so state upon his return, and the Commissioner will, if possible, obtain such facts from the donor, the last preceding owner, or any other person cognizant thereof. If the Commissioner finds it impossible to obtain such facts, the basis shall be the fair market value of the property as found by the Commissioner, as of the date or approximate date at which, according to the best information the Commissioner is able to obtain, the property was acquired by the donor or last preceding owner. In order to insure a fair and adequate appraisal or determination of the proper basis, persons making gifts of property should preserve an accessible record of the facts necessary to determine the cost of such property, and its fair market value as of March 1, 1913, where pertinent.

ART. 1594. Property acquired by gift or transfer in trust on or before December 31, 1920, or by bequest, devise, or inheritance. -In computing the gain or loss from the sale or other disposition of property acquired by gift or by a transfer in trust on or before December 31, 1920, or by bequest, devise, or inheritance, the basis shall be the fair market price or value of such property at the time of acquisition. The term "property acquired by bequest, devise, or inheritance" as used herein includes (a) such property interests as the taxpayer has received as the result of a transfer, or creation of a trust, in contemplation of or intended to take effect in possession or enjoyment at or after death, (b) such property interests as the taxpayer has received as the result of the exercise by a person of a general power of appointment (1) by will, or (2) by deed executed in contemplation of or intended to take effect in possession or enjoyment at or after his death, and (c) such property interests as the taxpayer has received as the result of a transfer or creation of a trust, where the enjoyment was subject to change through the exercise of a power, by the

grantor alone or in conjunction with another, to alter, amend, or revoke. In the case of property acquired by gift, bequest, devise, or inheritance, prior to March 1, 1913, the taxable gain or deductible loss from the sale or other disposition thereof shall be computed in accordance with article 1591. In the case of property acquired by bequest, devise, or inheritance, its value as appraised for the purpose of the Federal estate tax or in the case of estates not subject to that tax its value as appraised in the State court for the purpose of State inheritance taxes shall be deemed to be its fair market value when acquired.

ART. 1595. Property acquired by transfer in trust after December 31, 1920.- In the case of property acquired after December 31, 1920, by a transfer in trust, other than by a transfer in trust by bequest or devise, the basis shall be the same as it would be in the hands of the grantor, increased in the amount of gain or decreased in the amount of loss recognized to the grantor upon such transfer under the law applicable to the year in which the transfer was made. This article is not applicable, however, to property acquired by bequest, devise, or inheritance, as defined in the preceding article.

ART. 1596. Property acquired upon an exchange.—In the case of property acquired upon an exchange described in subdivision (b), (d), (e), or (f) of section 203 (see articles 1572-1577), the basis is the same as in the case of the property exchanged, (1) decreased in the amount of any money received by the taxpayer, and (2) increased in the amount of gain, or decreased in the amount of loss to the taxpayer that was recognized upon such exchange under the law applicable to the year in which the exchange was made.

Example. A purchased a share of stock in the X company in 1918 for $100. Pursuant to a plan of reorganization, A in 1924 exchanges his share for one share in the Y company, worth $90, and $30 in cash. Under the provisions of section 203 (d) (see article 1575), A realized a taxable gain of $20 from this exchange. The basis of the share of stock in Y is $90; that is, the basis of the share in X ($100) less the amount of money received by A ($30) plus the amount of gain recognized on the exchange ($20).