of any of the United States, or of any utility accruing to it (Sec. 213 (b) (7); Art. 87), income of a non-resident alien or foreign corporation from the operation of ships documented under the laws of a foreign country which grants a similar exemption to citizens and corporations of the United States (Sec. 213 (b) (8); Art. 89 (1)), receipts, except interest, dividends and rents, of shipowners' mutual protection and indemnity associations not organized for profit (Sec. 213 (b) (12); Art. 89 (4)), dividends paid to resident citizens of China by a corporation organized under the China Trade Act, 1922 (Sec. 213 (b) (13); Art. 89 (6)), income accrued prior to March 1, 1913, such as interest and compensation for services (Art. 90), and the portion of the sales price of an article relating to trading stamps which, in the experience of the business, will be eventually redeemed (Art. 91). Capitalization of a claim against a railroad at March 1, 1913, the claim being realized in a lesser amount in 1917, was not permitted, and I. T. 1294, allowing a claim for a patent infringement to be capitalized at that date, was disapproved (S. M. 2285). GENERAL SUMMARY OF INCOME As has been seen, the receipts of an individual or corporation are conceived by the law and the Treasury Department as being either income or return of capital. A receipt of cash may be either income or return of capital, depending on whether the books are kept on the cash or accrual basis, or not kept at all. There may be constructive receipt of income-not "psychic" income, but income of more or less direct physical benefit ordinarily received by other individuals in the form of cash. Were it not for the idea of constructive receipt, taxpayers would be discriminated against: some, through having benefits paid for them by debtors, or through various possible forms of organizations, would be enabled to report little or no income. Because of our present economic structure, there can be no unified concept of income. Money or money's worth and its proper differentiation between capital and revenue up to a given point of time offer almost insurmountable barriers to taxpayers whose complex problems are not accompanied by an application of proper accounting principles. Income, as a rule, must be accounted for in the year made available; any other method, such as that applied to dividends during the last five months of 1917, present such enormous difficulties that the computation would scarcely be worth the effort. The only exception to the rule that income cannot be accrued ratably over the period in which it is earned lies in the theory that accumulations of value, realized or unrealized, before March 1, 1913, belong to that period. And the exception strengthens the rule, especially as recently applied, for it is only that portion of the net profit or net loss which can be attributed to the period subject to income taxes that is of significance for tax purposes in the year of cash realization. Income constructively received must be reported as earned; otherwise, as has been pointed out, manipulation of the source of income over which the taxpayer has control would be possible. Income from forced conversions of the type described on page 81 is involuntary income and is not taxed if reinvested in good faith; and perhaps a somewhat similar idea lies behind the attempt of Congress not to tax certain non-cash exchanges. The seller, outside of income tax considerations, would, of course, prefer cash to property having no readily realizable market value unless the latter happened to be an equally or more preferred type of investment. But a stronger reason impels the general exemption of non-cash transactions. An income tax is based on the ability to pay, and since payment in cash may not be deferred, without penalties, to a later period, an effort has been made to eliminate the necessity of disposing of the assets received and to decrease the number of inducements to tax evasions. Considerations of income are inseparable from an analysis of deductions because it is only the net income on which the tax is based. The subsequent eight chapters, therefore, will take up the principles underlying deductions. |