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with cost and with the March ì, 1913 value, depreciated in both cases to the date of sale. Your profit is then calculated as follows:

Cost of building 1908....

Plus: Improvements 1912.
Improvements 1920.



8,000 $118,000

Less: Depreciation on cost (1908–1922)...$ 28,000
Depreciation on 1912 improvements


[blocks in formation]

Adjusted value of building as of March 1,1913
Plus: Value of land as of March 1, 1913...

Total adjusted value of property as of March

I, 1913......

[blocks in formation]

$ 22,500

320 22,820

$110,180 30,000


Since the adjusted value as of March 1, 1913, is higher than the adjusted cost, your taxable profit is $9,820 ($150,000 selling price minus $140,180).

(It will be noted that in the above example, depreciation accrued before March 1, 1913, has been deducted from cost whereas the Treasury Regulations do not specifically provide that depreciation before 1913 must be deducted. The above illustration is based upon ruling No. 1494 of the Income Tax Unit which appears as ruling No. 586 in Internal Revenue Bulletin No. 46 of November 13, 1922. This ruling does not have the force and effect of a Treasury Decision but apparently expresses the Unit's interpretation of the official Regulations.)

Q. How is gain or loss computed where property which has been acquired by gift is sold?

A. If the gift is received after December 31, 1920, the basis for computation is the cost of the property to the donor, or to the last preceding person who did not receive it by gift. For example:

B bought a house in 1915 for which he paid $10,000. In 1918 he gave the house to C, who, on April 15, 1921, gave the house to D. On November 20, 1922, D sold the house for $12,000. Under the present law, D must report as gain the difference between $10,000, the price which B, the last preceding person by whom the property was not acquired by gift, paid for it, and $12,000, the price at which D sold it. If D does not know what B, the "last preceding owner,' paid for the property, the law provides that the Commissioner shall obtain the facts from B. In this example no

account is taken of depreciation or other adjustments.

If the property disposed of had been acquired either by gift before December 31, 1920; or at any time by bequest, devise or inheritance, the basis for determining gain or loss would be the difference between the fair market value of the property when it was received and the selling price.

Q. William Morgan purchased $10,000 first mortgage 6% bonds at 95 on April 1, 1915. These bonds had a market value of $10,500 on October 11, 1922, when he exchanged them for $10,000 Liberty 2nd 44's, which were then selling at par, plus $500 cash. Did this transaction result in a taxable profit?

A. According to present rulings of the Treasury Department there is no gain or loss where a bona fide exchange of property held for investment is made for other property of a like kind. Mr. Morgan having made an exchange of this nature has no gain or loss to report. The Liberty Bonds he received take the place of the first mortgage bonds exchanged. The boot money he received reduces the cost to him of the original bonds held so that he will carry the Liberties at $9,000, (the cost of the first mortgage bonds, $9,500, minus $500 boot money). When he sells the Liberty Bonds, he will report as profit any sum he receives in excess of $9,000.


Q. What is meant by property of a like kind "?

A. These words are defined in the Regulations as having reference to the nature or character of the property and not its grade or quality. Accordingly, anyone other than a dealer,

may exchange real estate for real estate, evidences of indebtedness (such as bonds or notes) for evidences of indebtedness, and shares of stock for other shares of stock, and no gain or loss result from the transaction. The Treasury Department holds that one kind or class of property may not, however, be exchanged for property of a different kind or class—for instance, stocks for bonds or real estate for personal property.

Q. I have bonds with coupons maturing in 1922 still attached, as I have neglected to clip them. I did not cash the coupons in 1922. If I cash them in 1923, shall I consider the interest as income in my return for 1922 or my return for 1923?

A. Interest coupons are taxable for the year in which they mature, even though they are not cashed until a later year.

Q. A short time ago, the X Trust Company and the Y Bank merged their accounts under the name of the Y Bank. For my stock holdings in these banks, I received in exchange stock of the consolidated bank. Am I taxable for a profit?

A. No. Under the present law, exchanges of securities in consolidations and other reorganizations generally, do not result in gain or loss. If you later sell the stock of the consolidated bank, the gain or loss will be the difference between the selling price and the cost to you of the stock of the X Trust Company and the Y Bank before consolidation.

Q. I receive $500 a year interest on tax-free covenant bonds of a corporation. On this interest the corporation pays to the government 2 per cent tax. Is the tax so paid considered as additional income to me for tax purposes?

A. No. The 2 per cent tax paid by the corporation, however, may be deducted from the tax computed in your return.

Q. How is the amount of taxable income figured when shares of stock of a corporation are sold from lots purchased at different times and at different prices and the identity of the lots cannot be determined?

A. In such cases the Department has consistently held that the first stock sold must be charged against the earliest purchases.

Q. I received Liberty Bonds in part payment of my salary. Are the bonds taxable as income?

A. Yes. Where services are paid for with something other than money, the market value of the medium of payment on the

day it is received is to be included as income. If the services. were given for a stipulated price, this price, in the absence of evidence to the contrary, will be presumed to be the fair market value of the compensation received.

Q. What part of the proceeds of an endowment policy is taxable when payment is made to the insured at the end of the endowment period?

A. The taxable income is either (a) the difference between. the amount received in settlement and the total premiums paid on the policy less any dividends; or (b) the difference between the amount received and the combined sum of the cash surrender value of the policy on March 1, 1913, plus the sum of premiums paid, less dividends_received, since March 1, 1913, whichever is to your benefit. For example:

In 1902, "A" took out a 20-year endowment policy on which he paid an annual premium of $500. "A" received dividends on this policy averaging $30 a year. The cash surrender value of the policy on March 1, 1913, was $6,000. On maturity in 1922, "A" collected $12,000.


Option I

Premiums paid in ($500 x 20 years). .

Less: Dividends received ($30 x 20 years)...

Taxable income..

Option II


. $10,000


$ 2,600


Cash surrender value March 1, 1913.



Plus: Premiums 1913-1922 ($500 x 9 years) 4,500


Less: Dividends received 1913-1922 ($30 x 9


270 10,230

Taxable income.


Since the taxable income is smaller as computed under Option II, "A" will use that figure.

Q. What is net income?


A. Net income is your total income from all sources (except the items exempt from tax under Section 213 (b) see pages 15 and 67), less the deductions allowed by the Law. In computing net income, "deductions" should not be confused with "credits.' Deductions are used in computing taxable net income; credits are used to reduce net income in computing the amount subject to normal tax. (See questions I and 4 under the heading "Personal Exemptions," page 9.)


Q. What items may I deduct from gross income in ascertaining the amount of my net income?

A. You are entitled to deduct disbursements, such as ordinary and necessary expenses incurred in a business transaction; insurance premiums on business property; interest, except interest on indebtedness to buy or carry securities (other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer) the income from which is entirely exempt from tax; bad debts; business losses, etc.

The items which may be deducted are set forth in Section 214 of the Law, which appears on page 69 of this volume.

Q. On April 15, 1922, I paid a New York State personal income tax of $500 on income received during 1921. Is this tax deductible from gross income in my Federal tax return for 1922?

A. Yes. Income taxes imposed by States may be deducted the same as real estate or personal property taxes.

Q. Are the annual fees for an operator's or a chauffeur's license and the registration fee on an automobile deductible?

A. Yes. These items are allowable deductions regardless of whether the car is used for business or pleasure.

Q. During the year I made a number of business trips which cost me considerable money. May expenditures of this nature be deducted in my return?

A. Traveling expenses incurred in pursuit of your trade or business while away from home, including the entire amount expended for meals and lodging, are deductible.

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