Section 61 (a) (1) of the Internal Revenue Code of 1954 provides that, except as otherwise provided, gross income means all income from whatever source derived, including compensation for services. However, disbursements from a general welfare fund in the interest of the general welfare, which are not made for services rendered, are not includible in gross income. See Rev. Rul. 63-136, C.B. 1963–2, 19, which holds that benefit payments made under either the Area Redevelopment Act or the Manpower Development and Training Act of 1962 are not includible in the gross income of the recipients.

The Senate Committee report on the Economic Opportunity Act of 1964 (Report No. 1218, 88th Congress, 2nd Session) states on page 35 that Title V will stimulate the expansion of work experience and other needed training, including basic education, for needy individuals who are currently receiving some type of public assistance. This report points out that studies of unemployed persons aided under the public assistance programs indicate that in general these persons lack sufficient education and work skills to compete in the labor market. Many are either so lacking in knowledge and skills or in self-confidence because of prolonged unemployment they are not ready for training programs such as those offered by the Manpower and Development Training Act.

Some examples of constructive work experience in Title V projects are: simple maintenance in public roads, recreation areas and facilities; routine and general office clerical work; untrained aides and assistants in institutions, including such occupations as helpers, bus boys, and kitchen workers; trained practical nurses and nurses' aides, laboratory assistants and orderlies.

An assignment to work in an unskilled job may be a form of training to an individual who has never before

held a job. Such a program may be

habits such as regular attendance, promptness, appearance, job discipline, etc. Thus, in most Title V propline, etc. Thus, in most Title V programs the elements of work and training combine and overlap to such a degree that it is extremely difficult to characterize any program as being primarily work or primarily training. In most cases it would not be realistically feasible to dissect a program to determine the relative proportions of work and training contained therein.

However, in many cases the payments received under a work-training program are received in lieu of (and in amounts no greater than) payments that the participant was receiving based upon personal and family subsistence requirements from a public welfare agency prior to his participation in the work-training program. In such cases, the primary measure of the amount received is the personal or family need of the recipient rather than the value of any services performed and thus seems more in the nature of a welfare payment in connection with participation in a training program than a payment for services rendered.

Accordingly, amounts received by a participant in a work-training program, such as a program under Title V of the Economic Opportunity Act, are neither includable in income gross under section 61(a)(1) of the Code nor considered "wages" for purposes of the withholding of income tax at sources on wages or the taxes under

the Federal Insurance Contributions Act, provided that:

(1) participation in such work-training program was arranged and financed by a public agency from which the participant was receiving public welfare benefits based upon personal or family subsistence requirements, and

(2) the payments received under the work-training program (exclusive of any extra allowance that may be provided for transportation or other costs related to participation) are not greater than the amount of such public welfare benefits that he would have been receiving.

In the event that the amount received under the work-training program (ex

clusive of allowances, as described above) is greater than the amount that would have been received by the participant had there been no worktraining program, the entire amount received will be considered as taxable gross income and "wages", except to the extent that it can be demonstrated that the amount received exceeds the fair market value of the services performed under the program.

Revenue Ruling 67-144, C.B. 19671, 12, is hereby modified to the extent it holds that the payments received under the facts therein are includable in income.

26 CFR 1.61-1: Gross income.

Political contributions used for personal purposes by a candidate for office are includible in his gross income in the year diverted; contributions to a political candidate or a political organization are not deductible; I.T. 3276 and Revenue Ruling 54-80 superseded.

1

Rev. Rul. 71-449 1

A candidate seeking political office received contributions totaling $1,000 from individuals and organizations for use in his campaign for election to such office. During the campaign the candidate expended $600 of the contributed funds for campaign purposes. He used the balance of the campaign funds to reduce the mortgage on his personal residence.

Political funds are not taxable to a

political candidate by or for whom they are collected if they are used for expenses of a political campaign or some similar purpose. However, any amount diverted from the channel of campaign activity and used by a political candidate for any personal purpose is income taxable to such candidate for the year in which the funds are so diverted.

Held, in the instant case the $400 which represents the portion of the fund which the candidate diverted to his personal use is includible in his

1 Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.

gross income in the year so diverted. See Revenue Procedure 68-19, C.B. 1968-1, 810, which sets forth the factors considered by the Internal Revenue Service in determining the taxability of political funds.

Held further, contributions to a political candidate or a political organization are not deductible for Federal income tax purposes, since there is no provision in the Internal Revenue Code of 1954 that would allow such deductions.

I.T. 3276, C.B. 1939-1, 108, and Revenue Ruling 54-80, C.B. 1954-1, 11, are hereby superseded, since the positions set forth therein are restated under current law in this Revenue Ruling.

26 CFR 1.61-1: Gross income.

The amount paid by the seller of a newspaper to the purchaser who assumed liability for unearned subscriptions is includible in the purchaser's gross income; Revenue Ruling 68-112 amplified.

Rev. Rul. 71-450

S, a corporation, owned a newspaper business. S in a prior taxable year elected to report prepaid subscription. income of the newspaper business ratably under section 455 of the Internal Revenue Code of 1954. S entered into into an agreement to sell the newspaper to P (purchaser). Under the terms of that agreement, S received 5x dollars which was reported as the sales price. Under the terms of the same agreement, S paid to P (purchaser) 1x dollars, a sum equal to the amount of prepaid subscriptions existing at the time of the sale, to compensate P (purchaser) for taking over S's liability on these subscriptions. The sales price of 5x dollars did not take into account S's liability for these newspaper subscriptions. In the year of the sale S has, as required under section 1.455-4 of the Income Tax Regulations, included in its gross income the prepaid subscription income not previously included in its gross income pursuant to its election under section 455 of the Code.

Held, under the circumstances described above, the amount paid by S to P to compensate P for its assumption of the liability for the unearned subscriptions is includible in P's gross income under section 61 (a) of the Code.

Revenue Ruling 68-112, C.B. 19681, 62, dealing with the tax consequences to the seller, is amplified.

26 CFR 1.61-1: Gross income.

Educational assistance allowances paid by the Veterans' Administration under the Veterans' Readjustment Benefits Act of 1966 are excludable from gross income.

Rev. Rul. 71-536

Advice has been requested whether educational assistance allowances received by veterans from the Veterans' Administration and paid under the Veterans' Readjustment Benefits Act of 1966, Public Law 89-358, 80 Stat. 12, 38 U.S.C. 1651-1686, are excludable from gross income for Federal income tax purposes.

The Veterans' Readjustment Benefits Act of 1966 provides for the establishment of a veterans' education and training program for the purpose of providing vocational readjustment and restoring lost educational opportunities to those servicemen and women whose careers have been interrupted or impeded by reason of active duty after January 1955. Eligible veterans pursuing a program of education are entitled to receive monthly educational assistance allowances to meet, in part, expenses of subsistence, tuition, fees, supplies, books, and other educational costs.

Section 3101 (a) of Title 38 of the United States Code provides, in part, as follows:

(a) Payments of benefits due or to become due under any law administered by the Veterans' Administration and such payments made to, or on account of, a beneficiary shall be exempt from taxation

Accordingly, it is held that the educational assistance allowances paid by the Veterans' Administration under

the Veterans' Readjustment Benefits Act of 1966 are excludable from the gross income of veterans receiving such allowances.

26 CFR 1.61-1: Gross income.

Whether a savings and loan association recognizes ordinary income or loss upon the sale of an 85 percent undivided interest in each mortgage contained on a list of mortgages. See Rev. Rul. 71-399, page 433.

26 CFR 1.61-1: Gross income.

Exemption of compensation paid by the German Government on account of political persecution under National Socialism pursuant to Article XI(1)(c) of the United States-Federal Republic of Germany Income Tax Convention. See Rev. Rul. 71-477 page 479.

26 CFR 1.61-2: Compensation for services, including fees, commissions, and similar items.

The entire amount received by a retired military officer from a school board as an instructor in the junior program of the ROTC in accordance with 10 U.S.C. 2031(d) and Defense Department regula. tions is compensation includible in his gross income.

Rev. Rul. 71-307

Advice has been requested concerning the proper treatment for Federal income tax certain purposes of amounts received by the taxpayer under the circumstances described below.

The taxpayer, a retired military officer, was employed by a school board as an instructor in the junior program of the Reserve Officer's Training Corps. The taxpayer was compensated in accordance with 10 U.S.C. 2031(d) which states, in part, as follows:

(1) Retired members so employed are entitled to receive their retired or retainer pay and an additional amount of not more than the difference between their retired pay and the active duty pay and allowances which they would receive if ordered to active duty, and one-half of that additional amount shall be paid to the institution concerned by the Secretary of the military department concerned from funds appropriated for that purpose.

Department of Defense (DoD) Regulations 32 C.F.R. section 111.4(b) (2)

establishes who is the employing agency and who is to pay the individual as follows:

Retired personnel so employed shall receive their retired or retainer pay and an additional amount equal to the difference between their retired pay and the active duty pay and allowances, excluding hazardous duty pay, which they would receive if ordered to active duty. The institution is the employing agency and shall pay the full additional amount due to the individual employed. One-half of the additional amount shall be paid to the institution by the Secretary of the Military Department concerned from funds appropriated for that purpose.

Section 61 of the Internal Revenue Code of 1954 provides, in part, that gross income means all income from whatever source derived including compensation for services.

Section 1.61-2(b) of the Income Tax Regulations provides, in part, however, that subsistence and uniform allowances granted commissioned officers of the Armed Forces and amounts received by them as commutation of quarters are to be excluded from gross income.

The taxpayer excluded amounts received as allowances while an active member of the Armed Forces in accordance with section 1.61-2(b) of the regulations. The taxpayer now inquires whether the portion of the compensation received from the school board that is equal to the military allowances is excludable from his gross income pursuant to section 1.61-2(b) of the regulations.

Neither 10 U.S.C. 2031 (d) nor the DoD regulations provides that the retired officer is to receive allowances but rather they provide that the amount of compensation is to be measured by the difference between the taxpayer's retired pay and what his pay and allowances would be if he were on active duty. The reference to allowances in both 10 U.S.C. 2031 (d) and DoD regulation 32 C.F.R. section 111.4(b) (2) establishes only the amount of compensation and does not establish the nature of the compensation for Federal income tax purposes.

It is held that the entire amount received by the taxpayer from the school board is compensation and is includi

ble in his gross income pursuant to section 61 of the Code.

26 CFR 1.61-2: Compensation for services, including fees, commissions, and similar items.

Whether amounts paid by the American Heart Association as Established Investigatorship awards are excludable from gross income. See Rev. Rul. 71-379, page 100.

26 CFR 1.61–2: Compensation for services, including fees, commissions, and similar items.

Whether amounts awarded to participants in a science foundation fellowship program are excludable from gross income. See Rev. Rul. 71-538, page 97.

26 CFR 1.61-2: Compensation for services, including fees, commissions, and similar items.

Amounts received by students incident to internship program with a state legislature. See Rev. Rul. 71-559, page 102.

26 CFR 1.61-3: Gross income derived from business.

Determination of gross income for purposes of section 954(b) (3) of the Code. See Rev. Rul. 71-369, page 273.

26 CFR 1.61-5: Allocations by cooperative associations; per unit retain certificates-tax treatment as to cooperatives and patrons.

(Also Sections 1381, 1385; 1.1381-1, 1.1385-1.)

Tax treatment of a patronage dividend received by a production credit association from an exempt cooperative Federal intermediate credit bank in the form of the bank's class B stock.

Rev. Rul. 71-556

Advice has been requested whether a patronage dividend paid by a Federal intermediate credit bank to a production credit association, under the circumstances described below, must be included in the PCA's income gross for the taxable year in which received. The taxpayer, a production credit association (PCA), is a patron of a Federal intermediate credit bank (FICB), a cooperative organiation exempt from

Federal income tax under section 501 (c) (1) of the Internal Revenue Code of 1954. Both the FICB and the PCA operate on a fiscal year ending June 30. The FICB's class A stock, which was held by the United States Government, was retired in fiscal year ended June 30, 1970.

The PCA received a patronage dividend in fiscal year ended June 30, 1971, from the FICB in the form of the FICB's class B stock. Since the FICB is an exempt organization under section 501 (c) (1) of the Code, the provisions of subchapter T (sections 1381-1388) of the Code, relating to certain types of cooperatives and their patrons, are specifically made inapplicable by section 1381 (a) (2) (A). Thus, the tax treatment of the class B stock, received by the PCA as a patronage dividend from the FICB, must be determined under the provisions of section 1.61-5 of the Income Tax Regulations.

Section 1.61-5(b) (1) (iv) provides, in part, that amounts allocated in the form of capital stock on a patronage basis by a cooperative association with respect to products marketed for the patron, or with respect to supplies, equipment or services, the cost of which was deductible by the patron, shall be included in the computation of the gross income of such patron, to the extent of its fair market value, if any, as ordinary income at the time of its receipt by the patron.

Section 1.61-5(b) (2) of the regulations provides, in part, that if any allocation to which 1.61-5(b)(1) of the Code applies is received in the form of capital stock, and is redeemed in full or in part or is otherwise disposed of, there shall be included in the computation of the gross income of the patron, as ordinary income, in the year of redemption or other disposition, the excess of the amount realized on the redemption or other disposition over the amount previously included in the computation of gross income under section section 1.61-5(b) (1) (iv) of the regulations.

These regulations contemplate that the patron shall determine an amount representing the fair market value, if any, of capital stock received as a patronage refund at the time of its receipt. The patron shall include such amount as ordinary income in computing his gross income for the taxable year of receipt, and any excess of such amount thereafter received by the patron upon redemption or other disposition of the capital stock shall be includible as ordinary income in the gross income of the patron for the taxable year of redemption or other disposition.

Accordingly, in the instant case the amount of the patronage refund represented by the Class B stock that has been determined and included as ordinary income in the gross income by the PCA for the taxable year in which such stock was received from the FICB will be considered the fair market value of the capital stock. Furthermore, any amount realized by the PCA upon redemption or other disposition of the Class B stock by the PCA, over the amount previously included in the PCA's gross income for the taxable year of receipt, shall be included as ordinary income in the PCA's gross income for the taxable year of redemption or other disposition.

26 CFR 1.61-5: Allocations by cooperative associations; per unit retain certificates-tax treatment as to cooperatives and patrons.

(Also Sections 1381, 1385; 1.1381-1, 1.1385-1.)

Tax treatment of a patronage dividend received by a production credit association from an exempt cooperative Federal intermediate credit bank in the form of the bank's written notification of a reserve allocation.

Rev. Rul. 71-557

Advice has been requested whether that portion of a reserve account allocated to a production credit association by a Federal intermediate credit bank, under the circumstances described be

low, must be included in the production credit association's gross income.

The taxpayer, a production credit association (PCA), is a patron of a Federal intermediate credit bank (FICB). The FICB is a cooperative organization exempt from Federal income tax under section 501(c)(1) of the Internal Revenue Code of 1954. Both the FICB and the PCA operate on a fiscal year ending June 30. The FICB's class A stock which was held by the United States Government was retired in the FICB's fiscal year ending June 30, 1970.

Part of the FICB's net earnings from business done with its patrons is used to establish a reserve account. The FICB's additions to the reserve account are allocated to the FIBC's patrons (PCAs) on the basis of the business transacted by the FICB with the PCAs during the fiscal year. The allocation to the PCAs is accomplished by FICB sending a written notification to each PCA of the amount of the reserve which has been allocated to its (the PCAs) account. The conversion into money of the amount represented by the allocated reserve is subject to conditions entirely beyond the control of the PCAs.

Since the FICB is an exempt organization under section 501 (c) (1) of the Code, the provisions of Subchapter T (section 1381-1388) of the Code, relating to certain types of cooperatives and their patrons, are specifically made inapplicable by section 1381(a) (2) (A). Thus, the tax treatment of the reserve allocations received by the instant PCA from the FICB, must be determined under the provisions of section 1.61-5 of the Income Tax Regulations.

Section 1.61-5(b) (1) (iii) of the regulations provides, in part, that amounts allocated in the form of revolving fund certificates, retain certificates, certificates of indebtedness, letters of advice, or similar documents to a patron on a patronage basis by a cooperative association with respect to products marketed for such patron, or

with respect to supplies, equipment, or services, the cost of which was deductible by the patron, shall be included in the computation of the gross income of such patron at the fair market value of such document as ordinary income at the time of its receipt by the patron. Any document containing an unconditional promise to pay a fixed sum of money on demand or at a fixed or determinable time shall be considered to have a fair market value at the time of its receipt by the patron, unless it is clearly established to the contrary. However, any document which is otherwise subject to conditions beyond the control of the patron shall be considered not to have any fair market value at the time of its receipt by the patron, unless it is clearly established to the contrary.

Section 1.61-5(b) (2) of the regulations provides, in part, that if any allocation to which section 1.61-5(b) (1) of the regulations applies is received in the form of a document of the type described in section 1.61-5(b) (1) (iii), and is redeemed in full or in part or is otherwise disposed of, there shall be included in the computation of the gross income of the patron, as ordinary income, in the year of redemption or other disposition, the excess of the amount realized on the redemption or other disposition over the amount previously included in the computation of gross income under section 1.615(b)(1)(iii) of the regulations.

Under the facts stated above, the reserve allocations received by the taxpayer in the form of a written notification are considered not to have any fair market value in the taxable year of receipt. Accordingly, unless it can be clearly established to the contrary, no portion of such reserve allocations is includible in the gross income of the taxpayer in the year of receipt. However, any amount realized by the taxpayer upon the redemption or other disposition of the written notification by the taxpayer must be included as ordinary income in the taxpayer's gross income for the taxable year of redemption or other disposition in accordance

with section 1.61-5(b) (2) of the regulations.

26 CFR 1.61–5: Allocations by cooperative associations; per unit retain certificatestax treatment as to cooperatives and patrons.

(Also Sections 1381, 1385; 1.1381-1, 1.1385-1.)

Tax treatment of a patronage dividend received by a production credit association from an exempt cooperative Federal intermediate credit bank in the form of a participation certificate.

Rev. Rul. 71-558

Advice has been requested whether a patronage dividend paid by a Federal intermediate credit bank to a commercial bank, under the circumstances described below, must be included in the commercial bank's gross income for the taxable year in which received.

The taxpayer, a calendar year commercial bank, is a patron of a Federal intermediate credit bank (FICB), a cooperative organization exempt from Federal income tax under section 501 (c) (1) of the Internal Revenue Code of 1954. The FICB's class A stock, which was held by the United States Government, was retired in the FICB's fiscal year ended June 30, 1970.

The taxpayer received a patronage dividend in 1971 from the FICB in the form of a participation certificate. The conversion into money of the amount represented by the participation certificate is subject to conditions entirely beyond the control of the taxpayer. Since the FICB is an exempt organization under section 501(c)(1) of the Code, the provisions of subchapter T (sections 1381-1388) of the Code, relating to certain types of cooperatives and their patrons, are specifically made inapplicable by section 1381 (a) (2) (A). Thus, the tax treatment of the participation certificate must be determined under the provisions of section 1.61-5 of the Income Tax Regulations.

Section 1.61-5(b)(1)(iii) of the regulations provides, in part, that amounts allocated in the form of revolving fund certificates, retain certifi

cates, certificates of indebtedness, letters of advice, or similar documents to a patron on a patronage basis by a cooperative association with respect to products marketed for such patron, or with respect to supplies, equipment, or services, the cost of which was deductible by the patron, shall be included in the computation of the gross income of such patron at the fair market value of such document as ordinary income at the time of its receipt by the patron. Any document containing an unconditional promise to pay a fixed sum of money on demand or at a fixed or determinable time shall be considered to have a fair market value at the time of its receipt by the patron, unless it is clearly established to the contrary. However, any document which is otherwise subject to conditions beyond the control of the patron shall be considered not to have any fair market value at the time of its receipt by the patron, unless it is clearly established to the contrary.

Section 1.61-5(b) (2) of the regulations provides, in part, that if any allocation to which section 1.61-5(b) (1) of the regulations applies is received in the form of a document of the type described in section 1.61–5(b) (1) (iii), and is redeemed in full or in part or is otherwise disposed of, there shall be included in the computation of the gross income of the patron, as ordinary income, in the year of redemption or other disposition, the ex

cess of the amount realized on the

redemption or other disposition over the amount previously included in the computation of gross income under section 1.61–5(b)(1) (iii) of the regulations.

Under the facts stated above, the participation certificates received by participation certificates received by the taxpayer are considered not to have any fair market value in the taxable year of receipt. Accordingly, unless it can be clearly established to the contrary, no portion of such participation certificates is includible in the gross income of the taxpayer in the year of receipt. However, any amount realized

by the taxpayer upon the redemption or other disposition of the participation certificates must be included as ordinary income in the taxpayer's gross income for the taxable year of redemption or other disposition in accordance with section 1.61-5(b) (2) of the regulations.

26 CFR 1.61-6: Gains derived from dealings in property.

Treatment to be accorded the sale o farmland in summer fallow. See Rev. Rul. 71-348, page 122.

26 CFR 1.61-12: Income from discharge of indebtedness.

Whether gain is recognized under section 731 (a) of the Code to a bankrupt partner of a bankrupt partnership by virtue of discharge, under section 14 of the Bankruptcy Act (11 U.S.C. 32), of indebtedness as the result of an adjudication in bankruptcy. See Rev. Rul. 71-301, page 256.

Section 62.-Adjusted Gross
Income Defined

26 CFR 1.62-1: Adjusted gross income.

The Indiana gross income tax allocable to the gross income from an individual's trade or business is deductible from gross income in computing adjusted gross income; I.T. 3829 superseded.

Rev. Rul. 71-2791

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in I.T. 3829, C.B. 1946–2, 38.

The question presented concerns the deductibility of the Indiana gross income tax in computing the adjusted gross income of an individual taxpayer who is engaged in a trade or business.

The Indiana gross income tax is levied upon the "receipt of gross income" of all persons residing or domiciled in the State, upon the receipt

of gross income derived from activities or business or any other source within the State, and upon the receipt of gross income by all persons who are not resi

1 Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.