to both sides of the transaction. The creditor may desire to claim credit for the transaction as a bad debt deduction.

Voluntary assessments paid by stockholders not taxable.

REGULATION. Where a corporation requires additional funds for conducting its business and obtains such needed money through voluntary pro rata payments by its stockholders, the amounts so received being credited to its surplus account or to a special capital account, such amounts will not be considered income, although there is no increase in the outstanding shares of stock of the corporation. The payments in such circumstances are in the nature of voluntary assessments upon, and represent an additional price paid for, the shares of stock held by the individual stockholders, and will be treated as an addition to and as a part of the operating capital of the company. .. (Art. 543.)

If the payments are made as indicated the stockholders must consider the payments as capital investments. If the corporation is losing money and the stockholders are merely advancing funds with which to pay its debts or losses it might be better to arrange the payments in the form of advances. Failure of the corporation to repay would entitle the stockholders to charge off the advances as bad debts.

Taxes paid by vendee for vendor on profits from sale of property are income to vendor.

RULING. A vendee of a business agrees that in addition to the purchase price of the business he will pay the income and excess profit taxes of the vendor arising from the sale of said business. (Query.) Does the payment of the said taxes by the vendee constitute income to the vendor which the vendor would have to report on his income tax statement and pay a tax thereon?

(Answer.) Income, excess profits and war profits taxes paid by vendee for vendor on profits from sale of property to vendee constitute additional taxable income to vendor. (Telegram of inquiry from The Corporation Trust Company, and the reply thereto signed by Commissioner Daniel C. Roper, and dated May 2, 1919.)

An agreement to pay an additional sum to a vendor equal to the tax payable by him is an enforceable contract, but the calculation is a somewhat involved one. The amount payable

must be sufficient to pay the tax on the profit plus such additional sum as will enable the vendor to pay the tax on the amount received in excess of the original sales price. The vendee would properly consider the tax paid for the vendor a part of the purchase price of the property.

.

Net proceeds of "business" life insurance are income.REGULATION. The proceeds of life insurance policies paid upon the death of the insured to a corporation beneficiary, less any premiums paid by the corporation and not deducted from gross income, are to be included in its gross income. (Art. 541.)

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Although the premiums paid on "business" life insurance are not to be deducted as a business expense, a regulation of the Treasury permits them to be used as an offset against the gross amount received on the policies. The remainder of the amount received must be reported as taxable income.

Bonus received in stock.

.

REGULATION. . . . . Where common stock is received as a bonus with the purchase of preferred stock or bonds, the total purchase price shall be fairly apportioned between the stock and securities purchased for the purpose of determining the portion of the consideration attributable to each class of stock or securities and so representing its cost, but if that should be impracticable in any case, no profit on any subsequent sale of any part of the stock or securities will be realized until out of the proceeds of sales shall have been recovered the total cost.35 (Art. 39.)

This article is equitable and accords with good accounting practice.

Profit on purchase by corporation of its own stock not taxable.-Corporations sometimes purchase their own stock at a price less than par value. If the stock is retired or if it is carried as an asset on the corporation's books at par, the dif

See Chapter XXIV. "Section 215 (d).

"[Former Procedure] The former regulation provided that "the entire proceeds derived from the sale or transfer of such (bonus) stock is income subject to the normal and additional tax." (Reg. 33, Art. 4.)

ference between par value and cost should be credited to surOn this point the regulations provide as fol

plus account.

lows:

REGULATION. . . . . If, for the purpose of enabling a corporation to secure working capital or for any other purpose, the stockholders donate or return to the corporation to be resold by it certain shares of stock of the company previously issued to them, or if the corporation purchases any of its stock and holds it as treasury stock, the sale of such stock will be considered a capital transaction and the proceeds of such sale will be treated as capital and will not constitute income of the corporation. A corporation realizes no gain or loss from the purchase of its own stock.36 .... (Art. 542.)

CRITICISM OF FOREGOING REGULATION.-If a corporation were to resell treasury stock at a profit, as is frequently done, there would be no real difference between this transaction and one involving the purchase and sale of the shares of another corporation. When stock is donated or sold to a corporation at a nominal price to enable the corporation to secure working capital the resale of the treasury stock may in fact represent capital and if so the proceeds of the sale are not properly taxable. But if the stock is purchased as an investment any resale at a profit should be held to be a taxable transaction.

TREASURY STOCK-ACCOUNTING PROCEDURE.-In order that stock may be considered as full-paid and non-assessable, and thus provide a means whereby it may be legally sold by the corporation at less than its par value without liability attaching to the purchaser for the difference between the price paid

[Former Procedure]

REGULATION. "Treasury stock, wherever and whenever that term is used in connection with the accounts of the corporation or for income tax purposes, will be held to mean stock which had been previously issued by the corporation and which had been repossessed by it through purchase or otherwise and then carried on its books as an asset. If such stock is resold at a price in excess of its cost upon repossession, such excess shall be returned as income for the year in which resold. Unissued stock, which had been retained by the corporation for the purpose of future sale, will not, for the purpose of the income tax, be considered Treasury stock' and when sold no part of the proceeds of such sale will be considered taxable income. Nor will there be any deductible loss if such stock is sold at a price less than par." (Reg. 33, 1918, Art. 98.)

and par, arrangements are frequently made to issue capital stock for property or services in an amount in excess of the actual cash value of such property or services. A part of such stock is then "donated" to the corporation and is thereafter dealt with as "treasury stock." When sold, the proceeds are sometimes treated as income, but the usual and proper disposition is to credit an account called "Capital surplus" or "Working capital," or, better still, to credit the proceeds directly to the property or asset account.

Of course, the amount realized for the donated stock is capital. By a fiction, induced by foolish incorporation laws, it is made to appear that on one side the stock is issued for value received at $100 per share, and on the other side someone who has paid the alleged full value for it hands it back to the corporation as a gift, pure and simple. The courts are supposed to go to the substance of a matter and ignore the form, but it is questionable if they should be asked to declare as capital what a corporation itself denominates as income. Therefore, the corporation should be careful in handling the proceeds of the sale of treasury stock on its books to indicate clearly the fact that the so-called income is actually capital. Accounting practice is as follows:

If purchased by the corporation, cost price is the correct basis of book entry; if acquired by gift, opinions differ as to the form of entry. The best authorities sanction the setting up of the stock as an asset at par value, offsetting this entry by the creation of a reserve or surplus account which is designated as a capital item, and is clearly differentiated from the surplus which arises out of profits or is available for dividends.

As treasury stock is sold or otherwise disposed of, the asset account is credited and an adjustment is made between this account and the reserve or surplus account for the difference between the book value and the proceeds of the sale.37

Discount for cash not taxable.

RULING. Reference is made to your letter of the 15th instant, in which you state that a corporation has purchased a large quantity of

"Auditing, Theory and Practice (2nd edition), by R. H. Montgomery, page 134.

equipment and in consideration of making a prompt payment therefor has been allowed a cash discount. You ask to be advised whether or not this discount should be reported as income.

In reply you are informed that the discount allowed to the corporation purchasing this new equipment need not be reported as income, but the cost of the equipment as charged to capital must represent only the net cost after making allowance for the discount in question. (Letter to E. G. Shorrock & Co., Seattle, Washington, signed by Deputy Commissioner L. F. Speer, and dated November 26, 1918.)

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This ruling is in accord with what the author believes to be good accounting practice, but opinion on the point is divided.

Income from Export Business

A domestic corporation chiefly engaged in buying goods in the United States and shipping them to foreign countries and there selling them, having been taxed upon its corporate income from all sources, sued to recover that proportion of the tax compulsorily paid which its foreign business bore to its whole trade, upon the ground that a tax on income derived from the profitable sale of exported articles was a tax on the articles so exported, and therefore unconstitutional. The Supreme Court of the United States (May 20, 1918) in holding that the corporation was taxable upon its entire income used the following language:39

DECISION. . . . . The income tax is not laid on articles in course of exportation or on anything which inherently or by the usages of commerce is embraced in exportation or any of its processes. On the contrary, it is an income tax laid generally on net incomes. And while it cannot be applied to any income which Congress has no power to tax (see Stanton v. Baltic Mining Co.), it is both nominally and actually a general tax. It is not laid on income from exportation because of its source, or in a discriminative way, but just as it is laid on other income. The words of the act are "net income arising or accruing from all sources." There is no discrimination. At most, exportation is affected only indirectly and remotely. The tax is levied after exportation is completed, after all expenses are paid and

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Auditing, Theory and Practice (2nd edition), by R. H. Montgomery, page 378. Peck v. Lowe, 247 U. S. 165.