An inventor should have reported as income contributions which he used to defray living expenses (O. D. 1145).

Distinction between compensation for services and other forms of receipt. Where the president of a corporation, upon the sale of the corporation, agreed for a certain sum not to engage in a similar business, such sum was income to him and not conversion of capital (O. D. 668). Where an executor received a bequest contingent on continuous services in addition to regular salary, the sum received was regarded as additional salary and not a bequest (O. 980; Ream v. Bowers, 14 Fed. (2nd), 993). But compensation not contingent upon serving as an executor was held non-taxable (U. S. v. Merriam, 263 U. S., 179). Commissions received by an executor for selling property of the estate is income taxable in the personal return of the executor (O. D. 632). Bonuses are taxable income, but not if they are gifts (O. D. 570). An amount equal to the salary of an officer of a corporation was given to his widow, and was held to be a gratuity (O. D. 1017). But a gratuity for long and faithful service was held to be taxable (O. D. 1029) and retired pay and allowances to persons in the Army and Navy service were also held taxable (G. C. M. 341). Payments to a former employee while disabled for a year were taxable compensation (1 B. T. A. 1164). Benefits received from a labor union during strike was held to be gross income (O. D. 552 and I. T. 1293). Pensions received by teachers under the Carnegie Foundation were held at first to be taxable (O. D. 361) but later were held exempt as the compensation was classed as a gift rather than a pension (L. O. 1040). But payments made "for the education of young men and women" from a trust created for the purpose was taxable compensation (I. T. 2223). The last ruling is hardly consistent with the ruling immediately preceding or with the ruling that payments made to foreign students in the United States by their government or other foreign agency are exempt (I. T. 2161). A prize from a newspaper guessing contest (I. T. 1651) and an automobile received by the holder of a certain restaurant ticket (I. T. 1667) were regarded as forms of compensation. Employees who had subscribed for stock which was being paid in part or whole by dividends on the stock were required to report the dividends so applied as additional compensation for services at the time the title to the stock passed to the employee (O. D. 791). Dividends paid to the general manager of a corporation on stock to be held by trustees over a five-year period was taxable compensation to the extent that the stock had not been earned, that is, had not become property available to the manager should he leave the business (I. T. 2041). A stockholder

was required to report a sum as subject to both normal tax and surtax which had been disallowed as a deduction to the corporation because the stockholder rendered no services (A. R. R. 6035; Hayner v. U. S.,-Ct. Cl.,-). A distribution called a "tantième" was held to be compensation for services; it had not been proportionate to stockholdings at all times and a portion had been paid to a person not a stockholder (A. R. R. 6242).

Military exemptions. Pensions paid by the United States to widows of soldiers, as such, are not taxable income (O. D. 957), and this includes pensions received under the act of March 4, 1917, commencing January 1, 1921 (I. T. 1640). A state bonus to service men is tax exempt income to the recipient (O. D. 286). Civilian attachés, instructors, employees, and so forth, in the employ of naval or military divisions cannot claim the $3,500 exemption allowed under the 1918 act for compensation received between January 1, 1918, and December 31, 1920 (O. D. 1203, overruling O. D. 900) by soldiers and sailors (O. D. 435, 752, 462, 436, 329, 485, 663, 904 overruling 495). The Public Health Service was held not to be part of the military forces of the United States (T. D. 3242), but members of the United States Coast and Geodetic Survey were entitled to the exemption (I. T. 1402). Naval reservists' retainer fees are taxable income (O. D. 463). The $3,500 military exemption included discharge bonus, mileage from point of discharge to home, and ration money for periods of furlough (O. D. 370) but did not apply in 1921 to retirement pay received by a member of the Marine Corps (I. T. 1237). The exemption of $3,500, allowed by the 1918 act, was over and above the personal exemption (O. D. 123).

Non-taxable compensation. Compensation of state officers and employees is wholly exempt (T. D. 2843), but they must be in continuous and regular employment of a state, a political subdivision thereof (O. D. 545, 256), not on a retainer basis (I. T. 2036) or in the employ of an institution wholly supported by a state (O. 826, O. D. 1038). Compensation received by regular employees of a state under the Sheppard-Towner Act 1 was held to be non-taxable, although one-half is received from the United States (I. T. 1652). Payment on a per diem basis does not affect the rule (O. D. 33). Exempt income from a state has been held as not including:

(a) Fees received by court appointees, such as executors,

1 The Sheppard-Towner Act, passed by Congress November 23, 1921, provided for the establishment of state agencies "for the promotion of welfare and hygiene of maternity and infancy and for other purposes." The Federal Government pays one-half of the expenses of these agencies.

appraisers, attorneys, and receivers (O. D. 256, 369, 1305, 1316, 1245; S. M. 5287, 5694, 3969).

(b) Witness fees (O. D. 195).

(c) Salary jointly paid by state and private company (O. D. 553).

(d) Salary paid from endowment fund owned by state (O. D. 449), or from an institution of which the state was trustee, with limited powers (S. M. 5675), or from fees collected from the Federal Government (O. D. 484).

(e) Pensions paid to Confederate soldiers (O. D. 903). (f) Salaries of public school teachers where the school was maintained by a corporation (O. D. 963).

(g) Salaries of library employees where the library was a private corporation, notwithstanding that most of the funds came from a city (O. D. 973).

(h) Compensation of harbor pilots, appointed by state, but paid by those for whom service was performed (O. D. 916; A. R. R. 933).

(i) Salaries of teachers in Hawaii (O. D. 12) and Alaska (S. M. 5766).

(j) Salaries paid by foreign states (O. D. 20).

(k) Salary of chief engineer appointed by a sewerage commission created by a city council (O. D. 309) or salary as a consulting engineer in connection with similar projects (T. D. 3824); and salary paid to an employee of any municipally owned enterprise which is not strictly a part of the governmental function, such as a school cafeteria, waterworks, street railway, and so forth (S. O. 152; S. M. 2232; S. M. 5490, 3811; T. D. 3701).

(1) Notary fees turned over to a corporation (I. T. 1685). (m) Income received by a proxy which a state court stenographer was permitted by law to substitute (I. T. 1674).

(n) Income of a special investigator of a village who was not appointed through an act of law and whose compensation consisted solely of a percentage of fines levied following successful prosecutions (I. T. 1890).

(0) Salaries of appraisal experts employed by the Chicago Board of Local Improvements (Lyons v. Reinecke, 10 Fed. (2nd), 3).

Exempt income from a state has included:

(a) Fees for serving on a jury of a state or political subdivision thereof (O. D. 434).

(b) Compensation as a receiver appointed jointly by state and Federal courts; that portion paid by state only is exempt income (O. D. 503); compensation paid to a receiver of state banks in Kansas (I. T. 2214).

(c) Salary of referee in a state drainage project (O. D. 525).

(d) Compensation of a national guard officer; but when paid by the United States is not exempt (O. D. 942).

(e) Pensions to retired employees (O. D. 434, I. T. 1607). (f) Compensation to Spanish War veterans (I. T. 1253). (g) Salary from a state received by a non-resident alien (O. D. 274).

(h) Salary paid an attorney aiding a state controller (O. D. 494), or aiding a county collector (O. D. 1099).

(i) Salaries of members of the Virginia Debt Commission (O. D. 257).

(j) Compensation of public administrators in Missouri (I. T. 1693), and Montana, but fees received for services not contemplated in the statute creating the office were ordinary income (I. T. 2030).

(k) Amounts received by an Ohio sheriff in excess of the cost of feeding prisoners, which are a part of his compensation under the law (S. M. 2322). Recent rulings have emphasized that non-taxable compensation is limited to such amounts as are authorized by law for full-time services in connection with strictly governmental functions.

Evans v. Gore has no application to retired pay (I. T. 1243). Federal referees in bankruptcy are not exempt (O. D. 678). The United States General Appraisers were given the status of an inferior United States court by the act of August 5, 1909, and members thereof are subject to the same exemption as Federal judges (I. T. 1739).

FORGIVENESS OF INDEBTEDNESS

The cancelation of indebtedness, dependent on the facts of the case, may actually be a payment of income, a gift, or a capital transaction to the person or business benefited.

If canceled in consideration of services rendered, it is income. If canceled without consideration, but only to benefit the debtor, it amounts to a gift and is not income to the debtor. If a stockholder in a corporation forgives a debt due him from the corporation, it is a contribution of capital to the corporation (Art. 49).

Under the act of 1909 accounts payable outlawed and written off during the year represented taxable income for that year (Great Northern Railway Co. v. Lynch, 292 Fed., 903; T. D. 3147). No income arises from a cancelation of debts as the result of an adjudication in bankruptcy or from a composition with creditors following such adjudication (I. T. 1564), nor from a composition with creditors upon the dissolution of a corporation (S. M. 1495). The Board of Tax Appeals has held similarly with respect to any composition with creditors, although implying that the cost of future purchases may be affected thereby (3 B. T. A. 1319). A diminution of operating losses from 1913 to 1918 occasioned by the payment in 1921 of a loan in marks by dollars, following the fall of the mark, was not income (Bowers v. Kerbaugh-Empire Co., 271 U. S., 170). A partner's indebtedness assumed by another partner was looked upon as a gift and not a deductible expense (I. T. 1982).